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Full text of "Financial conflicts of interest in regulatory agencies: report"

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95th Congress 
2d Session 



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COMMITTEE PRINT 



COMMITTEF 
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FINANCIAL CONFLICTS OF INTEREST 
IN REGULATORY AGENCIES 



REPORT 



BY THE 






SUBCOMMITTEE ON OVERSIG^^^^j£LV'|Wy/ 
INVESTIGATIONS '''''^<^>/////f^' 

OP THE 

COMMITTEE ON INTERSTATE AND 
FOREIGN COMMERCE 

HOUSE OF REPEESENTATIYES 

NINETY-FIFTH CONGRESS 

SECOND SESSION 




22-871 



FEBRUARY 7, 1978 



U.S, GOVERNMENT PRINTING OFFICE 
WASHINGTON : 1978 



COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE 

HARLEY O. STAGGERS, West Virginia, Chairman 



SAMUEL L. DE\^NE, Ohio 
JAMES T. BROYHILL, North Carohna 
TIM LEE CARTER, Kentucky 
CLARENCE J. BROWN, Ohio 
JOE SKUBITZ, Kansas 
JAMES M. COLLINS, Texas 
LOUIS FREY, Jr., Florida 
NORMAN F. LENT, New York 
EDWARD R. ALA.DIGAN, Illinois 
CARLOS J. MOORHEAD, California 
MATTHEW J. RINALDO, New Jersey 
W. HENSON MOORE, Louisiana 
DAVE STOCKMAN, Michigan 
MARC L. aLA.RKS, Pennsylvania 



JOHN E. MOSS, California 
JOHN D. DINGELL, Michigan 
PAUL G. ROGERS, Florida 
LIONEL VAN DEERLIN, California 
FRED B. ROONEY, Pennsylvania 
JOHN M. MURPHY, New York 
DAVID E. SATTERFIELD III, Virginia 
BOB ECKHAEDT, Texas 
RICHARDSON PREYER, North CaroMna 
CHARLES J. CARNEY, Ohio 
RALPH H. METCALFE, Illinois 
JAMES H. SCHEUER, New York 
RICHARD L. OTTINGER, New York 
HENRY A. WAXMAN, Cahfornia 
ROBERT (BOB) KRUEGER, Texas 
TLMOTHY E. WIRTH, Colorado 
PHILIP R. SHARP, Indiana 
JAMES J. FLO RIO, New Jersey 
ANTHONY TOBY MOFFETT, Connecticut 
JIM SANTINI, Nevada 
ANDREW MA GUI RE, New Jersey 
MARTY A. RUSSO, Illinois 
EDWARD J. MARKEY, Massachusetts 
THOMAS A. LUKEN, Ohio 
DOUG WALGREN, Pennsylvania 
BOB GAMMA GE, Texas 
ALBERT GORE, Jr., Tennessee 
BARBARA A. MIKULSKI, Maryland 

W. E. Williamson, Chief Clerk and Staff Director 

Kenneth J. Painter, First Assistant Clerk 

Eleanor A. Dinkins, Assistant Clerk 

WiLUAM L. Burns, Printing Editor 



Subcommittee on Oversight and Investigations 

JOHN E. MOSS, California, Chairman 



JIM SANTINI, Nevada 
THOMAS A. LUKEN, Ohio 
DOUG WALGREN, Pennsylvania 
ALBERT GORE, JR., Tennessee 
CHARLES J. CARNEY, Ohio 
HENRY A. WAXMAN, Cahfornia 
PHILIP R. SHARP, Indiana 
ANTHONY TOBY MOFFETT, Connecticut 
ANDREW MAGUIRE, New Jersey 
ROBERT (BOB) KRUEGER, Texas 



JAMES M. COLLINS, Texas 
NORMAN F. LENT, New York 
MATTHEW J. RINALDO, New Jersey 
DAVE STOCKMAN, Michigan 
MARC L. MARKS, Pennsylvania 
SAMUEL L. DEVINE, Ohio (ex officio) 



HARLEY O. STAGGERS, West Virginia 
(ex officio) 

Lowell Dodge, Director, Oversight Task Force 

Mark L. Rosenberg, Counsel 

Ronald J. Cormier, Auditor (on detail fiom the General Accounting Office) 



John McElroy Atkisson, Counsel to the Subcommittee 
James L. Nellioan, Operations Director 



J. Thomas Greene, Counsel to the Chairman 



Bernard J. Wundkb, Jr., Minorilv Countei 
(II) 



LETTER OF TRANSMITTAL 



Congress of the United States, 

House of Representatives, 
Subcommittee on Oversight and Investigations, 

of the Committee on Interstate and Foreign Commerce, 

Washington, D.C., February 7, 1978. 
Hon. Harley O. Staggers, 

Chairman, Committee on Interstate and Foreign Commerce, Rayburn 
House Office Building, Washington, D.C. 

Mr. Chairman: This report documents intolerable laxity in pro- 
grams to control financial conflicts of interest at three regulatory 
agencies — the Federal Communications Commission, the Envh'on- 
mental Protection Agency, and the Food and Drug Administration. At 
all three, this Subcommittee discovered numerous instances of serious 
conflicts. In addition, this report documents the Civil Service Com- 
mission's singular ineptness in fulfilling its responsibility to monitor 
the effectiveness of agency conflicts programs and to facilitate improve- 
ments where needed. 

We found few signs of serious effort to eliminate conflicts of in- 
terest. Instead, the agencies sought to minimize or ignore the problem. 
One of the agencies, the Federal Communications Commission, actu- 
ally counseled its stock-owning employees on ways to evade a law 
prohibiting ownership of certain securities. 

We believe that the Congress has too long tolerated actual and 
apparent conflicts of interest in regulatory agencies. Officials in these 
agencies have a special duty to avoid bias of any sort, and, therefore, 
the widespread practice of owning stock in directly regulated compa- 
nies must be halted. 

We recognize that there is a legitimate interest in keeping invest- 
ment restrictions on federal officials to a minimum. However, this 
interest must be balanced against the need to avoid not only actual 
bias in regulatory decisions, but even the appearance of conflict, 
both of which can quickly undermine the already sagging public 
faith in federal regulatory programs. Clearly, investment opportu- 
nities exist that do not entail stock of, contracts with, or grants 
from, directly regulated companies. Strict restrictions should not 
discourage from public office the kind of people needed to make our 
regulatory programs work well. 

The time has come to tighten the federal laws and regulations on 
confficts of interest. Pending completion of this effort, the Congress 
must — through effective oversight — make certain that the agencies 
adhere to existing laws and regulations. 

(HI) 



IV 

Conflicts of interest will continue to thrive at regulatoiy agencies 
for as long as the agencies fail aggressively to enforce their own 
regulations, and for as long as Congress continues to neglect the 
problem. Solutions to the problem are within reach, but they depend 
on a change of attitude. It must be understood that failure to enforce 
conflict-of-interest prohibitions serves not only to compromise the 
credibility of involved agencies, but, ultimately, to undermine their 
every program. 
Sincerely, 

John E. Moss, 
Chairman, Subcommittee on 
Oversight and Investigations. 



CONTENTS 



Page 

Letter of transmittal in 

Chapter: 

1. Scope and Approach 1 

2. Findings, Conclusions and Recommendations 6 

3. Conflicts of Interest at the Federal Communications Commission __ 11 

4. Conflicts of Interest at the Environmental Protection Agency 17 

5. Conflicts of Interest: Special Government Employees at the Food 

and Drug Administration 24 

6. The Role of the Civil Service Commission 32 

7. Proposals for PuVjlic Disclosure of Financial Interests 37 

Appendix 41 

Minority views 86 



Digitized by the Internet Archive 
in 2013 



http://archive.org/details/financialconflicOOunit 



FINANCIAL CONFLICTS OF INTEREST IN 
REGULATORY AGENCIES 

CHAPTER 1 

Scope and Approach 

a. background 

This is a report of a study conducted by the Subcommittee on 
Oversight and Investigations to assess financial conflicts of interest at 
federal regulatory agencies. Our conclusions and recommendations, 
presented in Chapter 2, are based on information in an 80-page staff 
study, ''Conflicts of Interest in Regulatory Agencies" (May 20, 1977) 
and on hearings conducted by the Subcommittee on May 23, 24, and 
June 2, 1977.^ 

This study grew out of the Subcommittee's comprehensive report, 
^'Federal Regulation and Regulatory Reform," issued in October 1976 
at the end of the 94th Congress.^ That report found numerous instances 
of regulatory decisions not made in the public interest. It also presented 
evidence of conflicts problems, and concluded that each agency should 
forbid ''all ownership by regulatory employees of any financial 
interest, directly or indirectly through relatives or associates, in 
industries subject to the agency's regulations." 

The objective of the current study has been to determine in greater 
detail the extent and nature of ownership by agency officials of 
interests in regulated industry and, based on our findings, to develop 
a set of recommendations addressing the need both for improved 
agency performance and statutory change. 

B. SCOPE OF STUDY 

1. Issues explored 

This report explores conflict-of-interest issues arising from the 
financial interests of regulatory officials, such as stock holdings. It is 
not concerned with bias which might arise from other sources, such as 
offers of employment, prior employment in regulated industry,^ 
acceptance of gifts or expenses, or ex parte contacts in a particular 
proceeding between regulators and regulated industry. 

With respect to financial holdings, the issue is not whether regulators 
are motivated by avarice, or whether they are able to increase the 
value of their personal interest by affecting the future of a given 
company. Rather, the Subcommittee's concern is that such holdings 
might affect, or appear to affect, the objectivity or neutrality of a 
regulator in facing his or her regulatory responsibilities. 

1 "Conflict of Interest in Eegulatory Agencies." Hearings before the Subcommittee on Oversight and 
Investigations of the Committee on Interstate and Foreign Commerce, House of Representatives, 95th 
Cong., 1st sess., (1977), Serial No. 95-35 (hereinafter "Hearings"). 

2 Subcommittee on Oversight and Investigations of the House Committee on Interstate and Foreign 
Commerce, "Federal Regulation and Regulatory Reform," Subcommittee Print No. 75-981, 94th Cong., 2d 
sess. (1976). 

3 The Subcommittee's Report "Federal Regulation and Regulatory Reform" (note 2 supra) addresses 
the question of the "revolving door" in considerable detail, in Chapter 12, entitled "Quality of Regulators." 

(1) 



2, Agencies selected for study 

The Subcommittee selected three agencies for review — the Federal 
Communications Commission (FCC), the Food and Drug Adminis- 
tration (FDA), and the Environmental Protection Agency (EPA). 
We selected these agencies because they reflect a wide variety of 
conflict-of-interest problems related to financial interests that arise 
in regulatory agencies. 

The Federal Communications Commission is unique among those 
studied in the respect that Commissioners and employees at the 
FCC are covered by a statute that expressl}^ prohibits the ownership 
of any communications-related interests, including stock interests. 

We selected the Food and Drug Administration to study the i)ar- 
ticular conflicts problems arising \^dth special employees who serve 
in the capacit}^ of experts and consultants, including those who are 
members of FDA's 67 advisory panels. 

We selected the Environmental Protection Agency because, unlike 
either the FCC or the FDA, EPA is an agency whose regulations 
cover substantially all American industr}^ Thus, a rule prohibiting 
EPA employees from owning stock in all regulated companies would 
in effect impose an extremely broad ban on industrial stock ownership. 
Another reason for review^ing EPA was the agency's maintenance of 
a decentralized ethics counseling system, in which over 40 officials 
exercise some discretion in determining the appropriateness of em- 
ployee stockholdings. 

An additional reason for selecting both the FCC and the FDA 
was that those agencies had recently been the subject of General 
Accounting Office (GAO) studies."* The General Accounting Office 
reports pointed out certain weaknesses in the efforts of these agencies 
to avoid conflicts. We believed tliat questions raised b}^ the GAO 
reports required more thorough consideration and felt that it would 
be particularly^ useful to explore an important question not reached 
in the GAO studies: whether the defects GAO identified in the 
agencies' systems were actually resulting in conflict-of-interest 
problems. 

In addition to our survey of employees in the three agencies, we 
reviewed the financial statements of all Commissioners who served 
during 1974, 1975, and 1976 at the seven independent Commissions 
under the Subcommittee's jurisdiction.^ These statements are filed 
with the U.S. Civil Service Commission. 

Finally we reviewed the effectiveness of the Civil Service Com- 
mission in fulfilling the responsibility assigned to it under an Executive 
Order to monitor all federal agency programs designed to control 
financial conflicts of interest. 

C. METHOD OF INVESTIGATION 

The Subcommitteejpursued a uniform course in studying conflicts 
problems at each agency. We requested and were granted access to 
the financial interest statements filed by individual agency officials 

< "Actions Needed to Improve the Federal Communications Commission's Financial Disclosure Sys- 
tem." FPCD-7f)-51. Dec. 21, 1976. 

"The Food and Diur Administration's Financial Disclostire System for Special Govorronent Employees: 
ProKres.s and J'rohleins." Fl'C:]:)-76-<K). Jan. 24, l'J77. 

» The seven are: the (^on.siimer Product Safely Commission, the FoderpI Communications Commission, 
the Federal Power f^onnnission, the Federal Trade Coinmis.si()n, (he Interstate Commerce Commission, 
the Nuclear Regulatory ConnnisFion and the Securities and Exchange Conunission. 



at each agency. We reviewed the content of 630 files at the three 
agencies studied to check for financial interests in regulated companies. 
The review covered statements filed from January 1974 through 
January 1977. 

The Subcommittee then selected several officials at each agency 
and one Commissioner (at the FCC) for close scrutiny. The staff 
collected additional information respecting these individuals (job 
descriptions, actual duties, history and valuation of securities hold- 
ings, and line of business information on companies whose stock was 
owned) and in some instances interviewed the official or observed 
their participation in public meetings. This information is presented 
in the report as a series of case studies.® Our purpose was to assess 
how each agency dealt with what we judged to be potential and 
actual cases of confhct. While our intent was not to investigate indi- 
vidual officials, we nonetheless pressed each agency to take action 
with regard to individuals we believed to be in violation of the appli- 
cable statutes and regulations, and, with the exception of three unre- 
solved instances, the agencies have taken appropriate action on the 
Subcommittee's case studies. Because this report is designed to il- 
lustrate general problems and issues, it does not identify particular 
persons whose financial statements were reviewed. 

The Subcommittee staff also visited each of the agencies to inter- 
view the officials responsible for administering the agency's financial 
conflict-of-interest program. Based on these initial contacts, the staff 
requested the agencies to supply extensive documents, which were 
received and studied. In all cases, further agency visits, interviews, 
and document requests followed. 

The staff assessment of all of this information, which took place 
over the months of February, March, and April, 1977, culminated in 
an eighty-page Staff Study presented to Subcommittee members on 
May 20, 1977.^ This preliminary study was designed to assist mem- 
bers of the Subcommittee in evaluating the nature and extent of 
conffict-of -interest problems in regulatory agencies, and in preparing 
for Subcommittee hearings. 

The case studies and staff findings were then considered at the 
Subcommittee's conflict-of-interest hearings held May 23, 24, and 
June 2, 1977. The hearings provided an opportunity for extended 
and detailed consideration of the conflict-of-interest problems found 
by the staff to exist at each agency, and assessed the role of the Civil 
Service Commission in this area. 

Following the hearings, the Subcommittee sent letters to each of the 
three agencies and to the Civil Service Commission both to request 
information required to complete the hearing record, and in some 
instances, to obtain more detailed agency responses to the questions 
raised during the hearings. 

This final Subcommittee report brings together the informa- 
tion compiled at each of these stages of the Subcommittee's study. 

D. THE subcommittee's STANDARD OF REVIEW 

The statute controlling financial conflicts of interest is Title 18 of 
the United States Code, Section 208,^ enacted in 1962. This statute 



«|The case studies appear in Appendix V of this report. 

^ The staff study is reprinted as an Appendix to Hearings, supra, note 1. 

» See Appendix I of this Report for the full text of 18 U.S.C. 208. 

22-871—78 2 



makes it a crime for a federal official to participate personally and 
substantially in a matter in which he has a financial interest. The 
statute provides that this requirement may be waived for an employee 
who makes advanced disclosure of a financial interest and receives a 
determination that the interest is not so substantial that it is likely 
to affect the integrity of the official in the course of his service to the 
Government.^ 

An Executive Order, issued by President Lyndon Johnson in 1965,^*^ 
forbids all federal employees from having any direct or indirect 
financial interests that conflict substantially, or appear to conflict 
substantially, with their responsibilities and duties as federal 
employees. 

It is essential to note several differences between the statute and 
the Executive Order. First, the Executive Order in effect imposes a 
requirement that an employee sell or otherwise dispose of a financial 
interest before participating in a matter related to the interest. By 
contrast, the statute permits an official to avoid selling or disposing 
of a financial interest by providing a waiver for insubstantial interests, 
and by not foreclosing the option of withdrawing from participation 
in particular matters where the official has a financial interest. ^^ 

Second, the statute provides for criminal penalities, and has there- 
fore tended to be read and applied narrowly. The Executive Order 
contains no sanctions. 

Third, the statute speaks of ''substantial interest'* and "substantial 
participation'' while the Executive Order refers to "substantial con- 
flict." The fact that different terms are used, and not defined, has 
added to agency confusion on conflicts issues. 

Fourth, the statute clearly covers "constructive interests" (i.e., it 
treats interests of a spouse or a minor as interests of the government 
official). However, the langiiage of the Executive Order, which ad- 
dresses "direct or indirect" interests, is less clear. 

Finally, the Executive Order addresses the question of the appear- 
ance of conflict, (prohibiting interests which "appear to conflict sub- 
stantially" with official responsibilities) while the statute is silent on 
that issue. 

The Subcommittee developed and applied a standard that draws 
from both the statute and the Executive Order, in order to assess 
financial interest statements in different agencies according to a com- 
mon yardstick. The Subcommittee's standard was this: that a conflict 
of interest arises whenever a government official has a present or 
future economic interest which may influence or interfere with the 
exercise of that official's public responsibilities.^^ 

» The statute also provides that an agency may create an exemption by "prenoral nilo or rPRulatinn pub- 
lished in the Federal Register" for financial interests deemed too remote or inconsequeutial to alloct the 
integrity of an employee's services. 

>o Executive Order 11222. set forth in Appendix H of this report. 

" The statute provides that a waiver may be granted in writing by the "government oflTicial responsible 
for appointment (of the subject employee] to his position" (18 U.S.C. 208(b)). The Executive Order does 
not contain a provision for waivers. 

'2 The Subcommittee staff developed a suggested standard and circulated it to the Members of the Sub- 
committee in May 1977, prior to the Subcommittee's hearings, for comment and approval or disapproval. 
At the same time, a set of proposed guidelines for agency conflict-of-interest rules was circulated. A number 
of comments were received from majority and minority members and most were incorporat(>d. 

The reference to a "future economic interest" is included to cover a number of possible situations, among 
them a port folio set up in a trust that was not truly blind (in which investments would revert to the knowing 
regulator on expiration of the trust), and an anticipated inheritance of a substantial l)lock of stock in a 
regulated coini)any. However, these situations did not arise in the course of the study. A third possible 
future economic Interest, the prospect of employment at a future date, was excluded from the scope of the 
study. 



The intent of the Subcommittee in using this standard was to treat 
apparent and actual conflict in the same manner, as does the Executive 
Order. By ''actual conflict" we mean a conflict which has actually led 
an official into biasing his input in a regulatory decision. By "apparent 
conflict" we mean the situation in which an official owns stock or has 
other interests in a company affected by regulatory decisions or ac- 
tivities which are the responsibility of the office which employs him, 
but where it is not known whether bias based on this ownership has 
actually entered into any participation on his part. 

In the view of the Subcommittee, the prohibition of apparent con- 
fficts is essential. The Subcommittee believes that any departure from 
strict ethical standards by officials holding positions of public trust 
tends to diminish public confidence in the processes of regulation, and 
threatens, ultimately, to compromise the mtegrity and enforceability 
of all regulatory programs. 



CHAPTER 2 

Findings, Conclusions, and Recommendations 

a. subcommittee findings 

The Subcommittee, on the basis of its hearings and investigation,, 
inchiding an examination of several hundred files, has reached the 
following factual findings. 

(1) In all, the Subcommittee found financial conflicts of interest 
reflected in 243 of 630 files investigated at three agencies. ^^ 

(a) A substantial number of high-level officials in the three 
agencies studied have financial interests in companies regulated 
b}' their agency. 

(b) Similarly, a significant number of mid-level regulatory em- 
ployees employed in specific agency programs (e.g. pesticides or 
radiation programs in the Environmental Protection Agency), 
own stock or have other financial interests in companies directly 
regulated by the program. 

(2) The agencies routinely grant waivers, under 18 U.S.C. 208 (b), 
of the statutory prohibition against participation by officials in mat- 
ters in which they have a financial interest. Rarel}^ do the agencies 
exercise an alternative remedy: ordering employees to divest them- 
selves of financial holdings which present potential problems. 

(3) Extreme inconsistencies exist among agencies (and even among 
different parts of the same agency) as to how confhct-of-interest rules 
are interpreted and enforced. 

(4) The agencies have failed to give specific guidance to their em- 
ployees as to what financial interests should be avoided. 

(5) The terms ''substantial (financial) interests," ''substantial 
participation," and "substantial conflict" are not defined with speci- 
ficity by either the statute or the agencies. Hence, affected emploA^ees 
have no clear idea of what is required. 

(6) The Subcommittee did not find, in any of the three agencies 
studied, any system of public disclosure of financial interests that 
served effectively to deter conflicts of interest. Public disclosure is not 
widely used as part of conflicts avoidance systems. One disclosure 
program assessed by the Subcommittee, at FDA, lacked any detect- 
able impact on the widespread instances of conflict of interest found 
among the FDA employees studied. 

(7) The Civil Service Commission has failed to provide the leader- 
ship and guidance to agencies that could help to make the conflicts 
regulations more equitable and effective. 

B. CONCLUSIONS AND RECOMMENDATIONS 

The Subcommittee's findings lead to the general conclusion that 
substantial improvements are urgentty needed, both in the existing 
conflict-of-interest laws, and in their implemenation and enforce- 

»* A tabular summary of the flrst finding is presented at the end of this chapter. 

(6) 



ment by the agencies and by the Civil Service Commission. Accord- 
ingly, we offer the following specific conclusions and recommendations.^* 

L Revisions to 18 U.S.C, 208 '' 

(a) Conclusion.— The basic thrust of 18 U.S.C. 208, which is to 
permit government officials to retain financial interests (if they dis- 
qualify themselves from participation in matters related to their 
interests) rather than to require officials to dispose of such interests, 
is not satisfactory. Withdrawal of an official from decisions which, in 
the normal execution of his duties, would call for his participation, is 
undesirable. Officials hired and paid to occupy a position of public 
trust should have no impediments to the full execution of the tasks 
assigned to them. 

Becmnmendation. — The Congress should amend 18 U.S.C. 208(a) to 
eliminate the option presently left open to federal officials of with- 
drawing from participation in matters in which they have a financial 
interest. The statute should explicitly prohibit an official from acquir- 
ing or retaining financial interests in entities affected by matters in 
which he is involved or for which he is responsible, ^loreover, it 
should require the disposition of potentially conflicting financial 
interests within a reasonable time of accepting a new regulatory post. 

(b) Conclusion. — The grossly misused provision of 18 U.S.C. 208(b),' 
which permits waiver of the statute if the agenc}^ head makes a written 
determination "that the interest is not so substantial as to be deemed 
likely to affect the integrity" of the employee, m.ust be clarified. The 
agencies we studied use the waiver provision to avoid forcing em- 
ployees to divest of the stock. The agencies have granted waivers to 
employees with several thousand dollars worth of stock in regulated 
industries without any attempt to determine whether the stock was a 
significant portion of that person's net worth. Congress clearly 
intended that, as a general rule, government employees should not 
participate in matters in which they have a financial interest, and 
simply provided for waivers where the financial interest was very 
small. What has happened, however, is that agencies have applied the 
waiver provision so broadly that they have emasculated the general 
rule. Because the statute does not specify exactly what is "substan- 
tial," and because agencies' regulators have failed to give meaning to 
this term, agencies are free to permit employees to participate in 
matters affecting their financial interests. This allows conflicts that the 
Congress sought to prohibit when it passed 18 U.S.C. 208. 

Recommendation. — Title 18 U.S. Code, Section 208, should be 
further amended so as to limit the discretion of an agency to waive 
the statutory- provisions presently allowed if it determines that a 
financial interest "is not so substantial as to be deemed likely to affect 
the integrity" of the employee. The statute should clearly set forth 
the basis for allowing waivers, including remoteness of the interest 
from an official's duties, and insubstantial size of interest. In no event, 
however, should a holding qualif}' for a waiver on the ground that it is 
insubstantial, if it is valued at m.ore than $5,000 or more than five 
percent of an emplo3'ee's new worth, whichever is less.^^ 

1* Conclusions and recommendalions addressed to each of the three regulatory agencies studied, and the 
Civil Service Commission, are set forth in Chapters 3, 4. 5, and 6 respectively. Tabular data suir.marizing 
our investigation of the flnancicl inter^^st files of particular agency officials at each of the three ag^iici-'s are 
presented following this chapter. 

)5 See Appendix I of this report for full text of 18 U.S.C. 208. 

i« We are not proposing here that regulatory employees routinely be required to file statements of net worth. 
An employee should be required to make a full net worth report only in the event he seeks a waiver for a 
particular holding. 



s 

2. Improvements in agency programs to avoid conflicts of interests 

(a) Conclusion. — As a general rule, employees throughout the 
government should be held to the same standard with respect to 
conflicts of interest. However, the facts reveal that just the opposite 
is true. Because CSC has failed to perform effectively the role assigned 
to it, and because the agencies have failed to articulate clear guidehnes, 
decisions have been haphazard and inconsistent, both among agencies 
and even among different parts of the same agency. We found, for 
instance that at the EPA where the conflicts responsibility is divided 
among more than 40 ''deputy counselors," there are widely varying 
standards among the divisions. 

While there may sometimes be valid reasons why an agency or 
division should have conflicts standards that differ from the norm, 
these deviations should be put into effect only as a result of a conscious 
and fufly considered decision to do so. 

Recommendation. — The agencies should take specific steps to achieve 
consistent application of 18 U.S.C. 208 and Executive Order 11222, 
with active guidance and assistance from the Civil Service Com- 
mission. Further, absent a considered determination to the contrary, 
all parts of each agency should be subject to the same conflicts rules 
and enforcement. 

(6) Conclusion. — In moving to more consistent internal standards, 
agencies should elect stricter standards, rather than weaker ones. In 
EPA, for example, two of the approximately 25 divisions have adopted 
a standard that is relatively strict, but entirely reasonable. It pro- 
hibits officials employed in the regulatory programs of the division 
from having financial interests in companies regulated by those 
programs. This rule has the overriding virtues of simplicity, clarity 
and ease of enforcement, and is not unduly burdensome. 

Recommendation. — The Subconunittee strongly urges agencies to 
require each division, by written rule, to prohibit officials employed 
in specific regulatory programs (e.g. air, noise, water, pesticides, etc., 
at EPA) from owning financial interests in companies directly regu- 
lated under that program, and to permit waivers in extremely ex- 
ceptional cases only. 

(c) Conclusion. — The Subcommittee believes that, in general, 
employees would prefer to avoid situations in which they acquire 
financial holdings that pose a potential conflict. However, in the 
absence of clear guidance from the agencies, this is not always a simple 
task. For example, it is often not easy to tell, without some study, 
what firms may actually be regulated or affected by an agency, be- 
cause of the diversification of most large corporations. 

As a result, a clear need exists for the agencies to inform their 
employees sj^ecifically as to what stocks should be avoided. This need 
will become greater if the agencies move toward stricter standards, 
€LS the Subcommittee recommends. 

Recommendation. — Each agency should undertake to determine 
which specific financial interests (especially stocks, and particularly 
stock in companies directly subject to regulation) should be entirely 
j)rohibite(l for all its employees, indicating any additional prohibited 
holdings for em|)loyees in })articular divisions. Each agency should 
make that list well known to its employees. Such lists would be 
])eri()(lically updated. 

With ]esj)ect to financial interests not entirely prohibited to some 
or all agency employees, each agency should set forth clearly its defini- 



tion of the terms "substantial interest," /'substantial conflict," and 
^'substantial participation," and should inform its employees of subse- 
quent decisions or individual cases in this area to provide guidance. 

(d) Conclusion. — A requirement that officials publicly disclose their 
financial interests is insufficient, standing alone, to achieve progress 
toward eliminating confficts of interest. Disclosure requirements 
should be used only in tandem with a system of prohibited holdings. 

Recommendation. — Each agency, in restructuring its conflict-of- 
interest regulations, should place primary reliance on a system of 
prohibitions (including guidance to employees on interests that are 
prohibited) and use disclosure requirements only as a supplement 
whenever necessary or appropriate. 

3. Role of the Civil Service Commission 

(a) Conclusion. — The efforts of the Civil Service Commission to 
implement a 1965 Executive Order on confficts of interests, even 
after 1975 when it hired a single ''Ethics Counsel," have fallen far 
short of what is needed to give life to the Executive Order. More 
substantial resources must be devoted by the Commission to auditing 
the agencies' performance in issuing and enforcing conflict-of-interest 
regulations. 

Recommendation. — The Congress should establish an independent 
Office of Government Ethics, either within the Civil Service Commis- 
sion or as a separate office, require the office to monitor agency 
enforcement of ethics, and grant the office adequate authority to 
ensure full and uniform compliance with both the letter and spirit 
of conflict-of-interest statutes and regulations. 

The following three chapters (3 through 5) report on the Subcom- 
mittee's investigation of conflict-of-interest problems at the three 
agencies studied : the Federal Communications Commission, the Envi- 
ronmental Protection Agency, and the Food and Drug Administra- 
tion. Chapter 6 assesses the role of the Civil Service Commission. 
The flnal chapter looks at proposals for public disclosure mechanisms, 
including the President's 1977 Ethics in Government Act. Case studies 
and documents related to the report are contained in an Appendix. 



C. SUMMARY TABLES 



The following tables summarize numerically the Subcommittee's 
first finding above. 

TABLE 1.— OVERVIEW OF SUBCOMIVIITTEE STUDY OF CONFLICTS OF INTEREST 





Number of 

statements 

on file at 

Agency 


Number of 

statements 

reviewed by 

subcommittee 

staff 


Number 

found to be 

evidencing 

conflicts 

of interest! 


EPA 


1,650 


435 
45 
150 


2 94 


FCC. 


333 


S45 


FDA 


SCO 


U04 








Total 


2,883 


630 


243 









1 Interests exceeding either the Agencies' ow/n limits or the standard used in this study, as described in Ch. 1. 

2 The 94 in all cases own stock in companies regulated by EPA, and many own stock in companies regulated by the 
EPA program in which they are employed. 

3 All 45 have "constructive interests," i.e., ownership by spouse or minor children in communications stocks, owne;ship 
of v/hich by FCC employees is prohibited. 

4 100 of the 104 have filed public disclosure memoranda required because their interests in regulated industry 
exceed certam levels set forth in FDA guidelines. 



10 

Table 2. — Environmental Protection Agency 

1. Total financial interest statements filed by EPA employees (Mar. 1, 

1977) 1,650 

2. Total reporting to the Agency counselor (higher level Agency officials) _. 71 

(o) Number reviewed ^ 71 

(6) Number indicating financial interests, which on an agency-wide 

basis conflict with EPA regulatory functions 55 

3. Total reporting to deputy counselors (most EPA employees at GS-13 

and above, a few below GS-13) 1, 595 

(a) Number reviewed ^ 364 

(b) Number indicating financial interests which conflict with regu- 

latory functions of the EPA program in which the official is 

employed 39 

4. Total reviewed by subcommittee (2a and 3a combined) 435 

5. Total indicating conflicts (2b and 3b combined) 94 

1 The staff reviewed statements filed in 1975 and 1976. Several of the files we studied were under review 
by EPA at the time of our investigation. In 6 instances, the responsible Agency official had ordered divesti- 
ture of the interests in question, but divestiture had not yet been carried out in all cases. 

Table 3. — Federal Communications Commission 

1. Required to file under Commission regulations 333 

2. Number found by General Accounting Office (GAG) with spouse or 

minor child holding stock on FCC's prohibited companies list (waivers 
granted by FCC) 34 

3. Number transferring prohibited stock to spouse or minor (and obtaining 

waiver) after the completion of the GAO audit, but prior to the sub- 
committee's review 11 

4. Total prohibited holdings held by spouse or minor child ("constructive 

interests") 45 

Table 4. — Food and Drug Administration 

1. Total number of files in employee category studied 900 

2. Number reviewed by subcommittee staff": 

(a) Reviewed because of inclusion in a public disclosure file, kept 
by FDA for employees in the category studied with interests 
exceeding certain FDA limits 100 

(6) Identified in report of General Accounting Office 50 

Total 150 

3. Number holding interests evidencing conflict with official responsibilites. 104 



CHAPTER 3 

Conflicts of Interest at the Federal 
Communications Commission 

A. background 

The Federal Communications Commission was created in 1934 
". . . to make available, so far as possible, to all people of the United 
States a rapid, efficient, nationwide and worldwide wire and com- 
munications service. . . ." ^'' The Commission has seven commis- 
sioners, about 2000 employees, a budget of approximately $50 million, 
and is divided into several bureaus, each of which is concerned with a 
major portion of the Commission's business, such as the Broadcast 
Bureau (radio and TV), Cable Television Bureau, and the Common 
Carrier Bureau (long distance phone lines, etc.). 

Emplo^'ees and Commissioners of the FCC are covered by 18 
U.S.C. 208, Executive Order 11222, and Section 4(b) of the Com- 
munications Act with respect to their financial holdings. ^^ The prohibi- 
tions of 18 U.S.C. 208 are included in the FCC's regulations and 
prohibit an employee from participating substantially in any matter 
in w^hich he or she has a "financial interest." A waiver pursuant to 18 
U.S.C. 208(b) is allowed if the employee discloses to the agency the 
nature of the financial interest and the agency determines that ''the 
interest is not so substantial as to be deemed likely to affect the 
integrity of the employee's services." The Executive Order states 
that: '^ 

Employees may not (a) have direct or indirect financial interests that conflict 
substantially, or appear to conflict substantially, with their responsibilities and 
duties as Federal employees, or (b) engage in, directly or indirectly, financial 
transactions as a result of, or primarily relying upon, information obtained through 
their employment. 

Commissioners and employees are also subject to Section 4(b) of 
the Communications Act of 1934, which flatly prohibits any stock 
ownership in a communications-related company. The FCC's Execu- 
tive Director maintains a listing of stocks covered by the provision, 
dubbed the FCC's ;'4(b) list." 

The general prohibitions of the statute and the Executive Order and 
the special prohibitions of Section 4(b) are similar with tw^o exceptions. 
First, the provisions of the U.S. Code and the Executive Order apply 
to financial interests held by the employee's spouse or minor child 
(so-called "constructive interests") while the Commission has inter- 
preted the prohibitions of Section 4(b) to cover only interests held by 
the employee him or herself. Second, the Title 18 provision may, as 
described above, be waived by the agency upon an appropriate finding 
of insubstantiality, while there is no waiver provision for Section 4(b). 



17 See 1 of the Communications Act of 1934, 47 U.S.C. § 151. 
19 See Appendix IV for full text of § 4(b). 
19 Executive Order 11222 (See Appendix II). 

(11) 
22-871—78 3 



12 

B. GENERAL ACCOUNTING OFFICE REPORT 

During 1975 and 1976, the General Accounting Office conducted a 
review of the financial disclosure system of the FCC. In its report, 
issued on December 21, 1976, GAO" found that: ^^ 

'' — The Commission's, criteria for identifying positions whose 
incumbents should file financial disclosure statements [were in 
some instances too general and in others too limited] resulting 
in employees who held positions that greatly affected the com- 
munications industry not being required to file financial dis- 
closure statements. 

*' — The Commission did not have adequate procedures to 
insure that the financial disclosure statements were collected and 
processed as required and in a timely manner. 

'' — The Commission did not have followup procedures to 
insure that employees who had been required to disqualify 
themselves on matters affecting their financial holdings had in 
fact done so." 
GAO further noted with respect to constructive interests that : ^^ 

"During GAO's review of 333 employees' financial disclosure 
statements, it found that 34 em_ployees were granted waivers for 
57 constructive interests m companies the Commission defined 
as prohibited by Section 4(b). [This] indicates that employees 
retain the benefit of constructive interests even though the re- 
quirements of Section 4(b) have been complied with. GAO's 
position 'is that constructive financial mterests present as great a 
potential jor conflicts oj interest or the appearance of conflicts of 
interest as do those interests directly held by the employee. GAO 
feels that if an absolute prohibition in addition to existing 
Government-wide conflict-of-interest restrictions is necessary for 
Commission employees, it should apply to constructive interests 
as well as direct interests." [Emphasis added.] 

C. THE subcommittee's REVIEW 

The Subcommittee's review of the FCC system included an in-depth 
investigation of the 34 waiver cases identified by the GAO study. In 
addition, the Subcommittee reviewed the statements of all other em- 
ployees who received similar waivers subsequent to the period audited 
by GAO. The Subcommittee staff also conducted interviews with 
various officials at the Commission concerned with the conflict-of- 
interest regulations. 

D. THE FCC'S system FOR AVOIDING CONFLICTS OF INTEREST 

Under the FCC's regulations, ^^ most employees ranked GS-13 or 
above are required to file annual financial disclosure statements. In 
addition, new employees are required to file such statements within 
30 days after they begin their employment. The Chiefs of Commission 
Offices and Bureaus file their forms with the (^hairman. Employees 
in a Commissioner's office file their forms with the Commissioner, and 
all other employees file their statements with the Executive Director. 

'<'*' Actions Nporlcf] to Tipprovo the Fi^dcral Communications Commission's Financial Disclosure Sys- 
tem." Unicn;! Accounting OflJco, No. FrCD-76-51 (Dec. 21, 1<J76) p. "i". 
"Ibid, p. ii. 
«47C.F.R. 5 19.7;i=). 



13 

Where an employee has an interest in a company regulated by tlie 
Commission, he or she must request a waiver m order to participate 
in matters affecting the company. The waiver may be granted by the 
supervisory official to whom the request is submitted, upon a written 
finding "that the interest is not so substantial as to be deemed likely 
to affect the integrity of the employee's services." Before a waiver 
may be granted, the General Counsel must be given an opportunity to 
comment on the matter. 

A difficult question which the FCC (or any other agency) faces in 
considering waivers from 18 U.S.C. §208 is the definition of "sub- 
stantial interest." Obviously, this requires a subjective judgment as 
to the amount of stock ownership which might have some eflect upon 
and employee's decisions. There has been little guidance on this ques- 
tion from the Civil Service Commission. Several agencies have con- 
sidered minimum exception levels — that is — small dollar amounts of 
stock o^\Tiership which would be allowed under a general waiver 
provision. 

In considering whether an interest is "substantial," the Commission 
has not specified any "de minimis" amount, that is, a dollar level 
below which any holdings are deemed "insubstantial." Sometime in 
late 1975, consideration began in the General Counsel's Office of a 
"10/25" formula. This formula would permit a spouse or minor child to 
hold a single communications stock with a dollar value up to 10 per- 
cent of the employee's salary, and would also allow ownership of a 
group of communications-related stocks provided the total value did 
not exceed 25 percent of the employee's salary. On March 9, 1977, 
after approximately 18 months of consideration and after this Sub- 
committee's investigation had begun, that formula was presented to 
the Commission. Neither the public nor Commission employees were 
notified that the issue was being considered, and comments were not 
solicited. The Commission approved that formula and the General 
Counsel prepared a general memorandum detailing the formula on 
April 11, 1977.^^ That formula has not been distributed either to Com- 
mission employees or to the public. 

E. STOCK INTERESTS HELD BY FCC EMPLOYEES 

Of the 45 FCC employees GS-13 and above whose financial dis- 
closure statements were reviewed, we found the following instances 
of ownershif> in communications industry enterprises: (1 American 
Telephone and Telegraph, 5 employees; (2) Local telephone companies 
(bond or warrants), 3 employees; (3) General Electric Corp. (makes 
radio and TV components), 2 employees; (4) RCA Corp. (TV and 
radio stations and various other communications interests), 1 em- 
ployee; (5) CBS (TV and radio network), 1 employee; (6) Siemens 
Corp. (manufacturer of wire communications parts), 1 employee; 
(7) Avco Corp. (has a wholly-owned subsidiary, Avco Broadcasting 
Corp., which is a Commission licensee), 1 employee; (8) Gladding 
Corp. (manufacturer of CB radios), 1 employee; (9) Entron (cable 
television system owner) 1 employee; (10) GeneralCable (manufac- 
tures components for wire communications) , 1 employee ; (11) Eepub- 

23 The momorandum supplied to the Subcommittee was not issued or directed to any particular person 
or ^roup but serves only as a guide to the case-by-case implementation of the formula by the FCC's General 
Counsel. The memorandum is reproduced in Appendix VIL 



14 

lie Carp, (furnishes services to companies which manufacture com- 
munications components), 1 employee. 

F. TRANSFERRING STOCKS TO SPOUSES 

The FCC's ''enforcement" of Section 4(b) is a sham. The FCC in- 
forms an employee that a stock is on the ''prohibited" list, and the 
employee responds mereh' by transferring the stock to his or her spouse. 
In testimony before the Subcommittee, Mr. Richard Lichtwardt, the 
FCC's Executive Director, stated the following :^^ 

Mr. Rosenberg (Subcommittee Counsel). [C]an you give us an indication of 
how high the percentage is? You order an employee to divest under 4(b). What 
percentage of the employees transfer the stock and then submit to you a photo- 
copy of the letter which transfers the stock to the spouse? 

Mr. LiCHTWARDT. I would state the majority. 

Mr. Rosenberg. Would it perhaps be 60 or 70 percent, or only 50 percent? 

Mr. LiCHTWARDT. I would say 60 or 70 percent, 

Mr. Rosenberg. Sixty to 70 percent have in fact simply transferred their 
interest to a spouse or minor child? 

Mr. LiCHTWARDT. That is correct. 

In fact, the correct answer is 100 percent. The Commission, in 
responding to the Subcommittee's follow-up questions after the hear- 
ing, stated that : -^ 

From January 1, 1975 to the present, (12) employees were advised to divest 
financial interests under §4(b) of the Communications Act. With two exceptions, 
each employee's initial report indicated the financial interest as a joint ownership 
with a spouse, minor child, or member of the immediate household. Ten (10) 
emplo3'ees divested themselves of their share of the interest, leaving full control 
of the financial interest with a spouse, minor child, or member of the immediate 
household. Two (2) employees owned the financial interest outright, and divested 
and transferred full control of the interest to a spouse, minor child, or other mem- 
ber of the immediate household. All 12 employees applied for a waiver pursuant 
to Title 18 U.S.C. 208. Eleven (11) of the 12 waiver requests were approved, 
with the remaining employee being advised that the position occupied made it 
unlikeh^ that the employee would participate in matters affecting the companies 
in which the spouse holds a financial interest. Xo waivers were denied. Two of the 
approved waivers are under review because the financial interest exceed the 
10/25 formula approved by the Commission on March 9, 1977_ [Emphasis added.) 

In addition, there are indications that the Commission has implicitly 
encouraged such transfers, by indicating in advance that the spouse's 
holdings would receive a waiver under 18 U.S.C. 208(b). Mr. Licht- 
^vardt and Mr. Fred Goldsmith (the FCC official responsible for 
checking stock holdings), testified as follows :^^ 

Mr. Rosenberg. Are there cases where an employee has been told to divest 
and an additional paragraph has been added stating, "However, you are of course 
subject to 208, and we feel that based on the valuation j-ou would receive a 
waiver under 208;" in other words, in advance telling an employee a waiver 
would be given? 

Mr. LiCHTWARDT. I am not aware of such cases; [where] an employee who has 
a holding which under 4(b) is not permitted is told to divest of that holding. 

Mr. Rosenberg. There is never anything in the letter telling him that the 
waiver would be given? 

Mr. CioLDSMiTH. I think you have seen some correspondence. 

Mr. R()SENBf:rg. I certainly have. 

Mr. Goldsmith. That has been in some of the correspondence. 

Mr. Rosenberg. So in advance the employee has been told, in effect, "If you 



2» Hearings, p. Jo. (Sec footnoto 1 for full citation.) 

" Hearings, p. 54. (Lfitlcr to John E. Moss from Richard E. Wiley, dated June 10, 1977.) 

» Hearings, p. 26. 



15 

do transfer to your spouse or minor child, you are su})ject to 20S, }>iit we think 
that based upon the valuation of the stock that it would not seem to be signifi- 
cant under the waiver provision of 208." Is that correct? 
Mr. Goldsmith. That is correct. 

The Commission's interpretation of Section 4(b) as applying: only 
to employees and its allowance of paper transfers to spouses has 
apparently been utilized by the FCC for many years, thou.j:,^h the 
Commission could not cite any specific le^slative history to sui)j)ort 
this interpretation. While the Commission admitted that this sub- 
stantially limited the practical effect of §4(b), (Jhairman Wiley main- 
tained that the Commission's interpretation of both §4(b) and 18 
U.S.C. 208(b) was correct. Chairman Moss addressed this situation 
as follows : ^^ 

Mr. Moss. The law could not contemplate it. The law was not written to reach 
that result. If you are subject to a law which states you shall not have any interest, 
as 4(b) does, and you enumei'ate the various forms of interest w^hich are pro- 
scribed, and go ahead to permit the mere transfer to a child or to a wife, then I do 
not think you are being at all responsive to that law. I do not think there is any 
way anyone can go to the legislative history and find that as the intended result 
Congress sought to achieve. 

Mr. Wiley. I make two responses to that, if I may. The first would be that it 
seems to me that 4(b) is a very restrictive provision. 

Mr. Moss. It was intended to be. 

Mr. Wiley. It may be it is overly broad because without a significant regulative 
test our emplo3'ees are not permitted to have any stock holdings even if it has an 
extremely tangential relationship to what the Commission does and even — 

Mr. Moss. The remedy, ]Mr. Chairman, is to come to the Congress and ask that 
the law be changed. It is not to interpret it and administer it in such a way as 
to make a mockery of it. 

G. CONCLUSIONS 

(1) The Federal Communications Commission has allowed certairr 
of its high-level employees to retain economic interests in companies 
which are engaged in the communications business. The FCC avoids 
the flat prohibition on such interests contained in § 4(b) of the Com- 
munications Act of 1934 by fostering the practice of encouraging 
employees to transfer their stock to a spouse and receive a waiver of 
the statutorv provision requirino- non-participation. 

(2) The FCC failed, until the adoption of the '40/25" formula in 
April 1977, to develop a clear and adequate standard to determine 
when a stock interest is likely to be ''substantial." The formula, 
however, has not been distributed to FCC employees. 

(3) Although the FCC has compiled a "prohibited stock hst," that 
list is of little operative significance because it merely tells the em- 
ployee which stocks must be placed in the si)Ouse's name. Further, 
since the list is not made available to FCC employees generally it 
provides little advance guidance for employees considering stock 
purchase. 

H. RECOMMENDATIONS 

(1) Unless and until § 4(b) of the Communications Act is amended, 
the FCC should obey it, rather than circumvent it. 

(2) The Congress should consider an amendment to Section 4(b) 
of the Communications Act of 1934 which would clarify its intent 

2' Hearings, p. 27. 



16 

"U'ith respect to absolute stock prohibitions. Such an amendment 
should distinguish between sig-nificantly regulated and marginally 
regulated companies, and explicitly prohibit constructive interests 
in significantly regulated companies. Congress should consider limiting 
the absolute prohibition on stock o^^^lership to stock in any company 
regulated (whether significantly or marginally) by the employee's 
bureau, and to the owTiership of stock in companies regulated sig- 
nificantly, but not marginally, by other FCC bureaus. 

(3) The Commission should inmiediately develop guidelines for 
determining when a constructive economic interest is sufficiently 
sig-nificant to bar waiver under the statute. The Commission could do 
this either by specifying certain stocks that could not be held by 
employee's spouses (such as AT&T by Common Carrier Bureau 
employees, and broadcast network stocks by Broadcast Bureau 
employees), or by specifying the maximum dollar amounts or per- 
centage of net worth that could properly be held. 

(4) The Commission should revise and distribute annually to all 
employees a ''prohibited stock list" with updated revisions distributed 
as necessary. The list should identify ''significantl}^" and ''marginally'^ 
regulated companies by each bureau. 

(5) In conjunction ^^dth the "prohibited stock list," the FCC 
shoidd circulate a guide to its employees on conflicts matters, written 
in clear English, (that would go beyond a recitation of the laws and 
regulations) and explaining employee responsibilities, including the 
so-called 10/25 formula, if retained by the Commission. 

(6) The Commission should require that a waiver request for a 
constructive economic interest (such as a spouse's stock) be submitted 
immediately upon acquisition of the interest, and that the Executive 
Director's decision be rendered within 30 days of the request. In 
the event that divestiture is ordered, it should occur within reason- 
able time, 90 days at most. Until divestiture occurs, the employee 
should refrain from participating in any matter affecting the company 
involved. 



CHAPTER 4 

Conflict of Interest at the Environmental Protection 

Agency 

A. background 

EPA administers a number of statutes designed to protect luiman 
health and the environment from the effects of pollutants and other 
hazards, such as toxic chemicals, pesticides, waste, etc., found in air, 
drinking water, food and in the waters generally. EPA conducts 
research, monitors, sets standards and undertakes enforcement activ- 
ities with an operating budget of about $1.1 billion and nearly 11,000 
employees. 

Employees at the Environmental Protection Agency are subject to 
the provisions of Title 18 of the United States Code and Executive 
Order 11222 with respect to conflicts of interest. The EPA, created 
under a Reorganization Plan in 1970, did not adopt conflict of interest 
regulations until April 1973.^^ Under those regulations, EPA desig- 
nated its Deputy General Counsel as ''Agency Counselor" for conflict- 
of-interest matters. It also designated 40 ''Deputy Counselors" — 
Assistant Administrators, Deputy Assistant Administrators, heads 
of certain staft' offices. Regional Administrators, and Directors of 
National Environmental Research Centers. 

These Deputy Counselors were to review the financial statements 
of those in their division required to file, to counsel employees on 
financial conflicts, and to consult with the Agency Counselor on 
special problems. The regulations also specified the positions whose 
incumbents were required to file financial statements — in general, all 
positions GS-13 and above. Because of the way the "Deputy Coun- 
selor" system was set up, the Deputy Counselors have widely varying 
work loads for this function. Some review only one or two disclosure 
forms per year, while others review as many as 200. Twenty-four of 
the forty Deputy Counselors review 10 forms or less per year. 

B. inconsistent rules within EPA 

The system of widely fragmented decisionmaking within EPA for 
conflict-of-interest questions has resulted in extreme variations in the 
application of its regulations. In two divisions. Mobile Source Air 
Pollution Control (MSAPC) and the Ofl[ice of Noise Abatement Con- 
trol (ONAC), the Deputy Assistant Administrators (who head the 
divisions and are Deputy Counselors) have — on their own — imposed 
strong and seemingly effective systems which are designed to eliminate 
even the appearance of conflicts. These programs are discussed below. 
No other divisions appear to have programs as strict as those of 
MSAPC and ONAC. The Subcommittee staff's review of the files 
and programs of several other Deputy Counselors illustrates that 
numerous situations which would not have been tolerated in MSAPC 



28 40C.r.R. 13.302(c). 

(17) 



18 

and OXAC are allowed in other divisions, including in the extremely 
sensitive areas of pesticides and radiation regulation. ^^ 

This situation, whereby different standards are followed throughout 
the agency, results from several factors. First, the Agency Counselor 
offers minimal guidance to the Deputy Counselors. Second, the very 
general language of the statute and regulations provide little direction 
as to the proper standards to be applied. Third, the conflict-of-interest 
function is a low priority for most Deputy Counselors, especially 
those who review only a few forms annually a.nd therefore have little 
incentive to develop expertise in resohnng conflicts issues. Conse- 
quently, an effective program will onl}?- develop where a Deputy 
Counselor has a strong personal commitment to a high standard. This 
result, which is apparenth' unrelated to any objective measure of need 
for an effective program in a particular division, creates diff'erent 
ethical standards within the agency. 

C. MOBILE SOURCE ATR POLLUTION CONTROL CONFLICTS REGULATIONS 

In the interim between the establishment of EPA in 1970 and the 
first published EPA regulations on conflicts in April, 1973, Eric O. 
Stork, the Deputy Assistant Administrator for Mobile Source Air 
Pollution Control, developed a set of ''ground rules" for his emploj^ees. 
After the EPA regulations were issued, the Deputy Assistant Admin- 
istrator reissued those ''ground rules" on August 1, 1973 ^° to empha- 
size the fact that they were supplements to, rather than replacements 
for, the general EPA regulations. The "ground rule" concerning finan- 
cial interests was that: 

All employees of MSAPC, without exception, may not . . . [o]wn or acquire 
securities (stocks, bonds) of companies that are subject to MSAPC regulations, 
i.e., automobile or auto parts manufacturers, oil companies, aircraft manufac- 
turers, airlines, pollution measurement instiument makers, or any other company 
that could be directly affected bj^ or that could profit fi'om regulatory actions 
taken by EPA in the subject areas of MSAPC cognizance. The sole exception to 
this rule is the indirect ownership of such securities through ownership of shares 
in a mutual fund in which the shareholder can have no possible influence on the 
buying and selling of securities by the management of the fund. 

In efl*ect, Stork's "ground rules" modified the EPA regulations for 
his division by eliminating the possibility of receiving a waiver for any 
stock ownership in a regulated com])any, exce])t for mutual funds. ^^ 
Under the EPA regulations, an MSAPC em})lo3^ee could "appeal" 
such a determination to the Agency Counselor, but in ])i-actice, Stork's 
"ground rules" imposed a higher standard than the EPA regulations 
with respect to stocks. 

MSAPC enforces its "ground rules" assiduously, and has ordered 
em])loyees to divest themselves of i)articidar interests from time to 
time. In the Subcommittee's view, this is an appropriate system for 
employees of a regulatory program. 

D. PRIOR STUDIES AND RECOMMENDATIONS WITHIN EPA 

The EPA's Deputy Assistant Administrator for Noise Abatement 
and Control, Charles L. Elkins, has also sought to have employees in 

^i' Several caso studios based on Uiis review are presented in Appendix V(b) of this report. 

*" The ground mles were a^ain reisstied, with minor changes, on June 1, l'>>76. See Hearings, p. 61-64, for 
full text of the 1970 version. (The full name of Mr. iStoik's administrative unit is "Ollicc of Mobile Source 
Air Pollution C'ontrol," refeired to in this leport as "MSAPC.,') 

»• The 1!»76 version of this ground nile relaxed tlie no-waiver policy. Tt provided that "Exception to this 
penerul rule may ho granted in individual cases, if full and adequate justification of the need for an exemptiou 
is provided." See Hearings, p. 62. 



19 

his proj^ram avoid any actual or potential conflicts of interest. Because 
of his fear ''that the Environmental Protection Airency mi^j^ht ^^o the 
way of many other reo;ulatory a(j:encies and become, over the years, a 
'captive of the industries which it re<!:ulates," ' this Dej)uty Assistant 
Administrator, prior to the time he assumed his current post, com- 
missioned an outside study of conflict-of-interest regulations and 
practices.^^ 

In the area of financial disclosure, the report recommended that 
agency heads be subject to the same rules as employees and that 
disclosure be audited by a revolving committee of three to five em- 
ployees. It also recommended that every employee be required to 
report all financial and employment interests, no matter how remote. 
Further, it recommended that certain ty])es of securities transactions 
be prohibited and that the EPA make public a list of its regulated 
companies for the guidance of employees. 

EPA's General Counsel reviewed the report and, in a memo to EPA 
Administrator Russell Train, dated May 5, 1975, indicated his dis- 
agreement with most of the recommendations. 

The General Counsel disagreed, for example, with the suggestion 
that an employee's committee be established to monitor disclsoure 
forms, believing that this would dilute the responsibility placed on the 
Deputy General Counsel. He commented that: 

My only question about the present system is whether the entire review of 
financial statements should be centralized in the Office of the General Counsel, 
to provide uniformity and tighten standards. We are presently reviewing all the 
Agency's financial statements; the results of this review should tell us whether 
the present system should be changed. 

Following the submission of the report and the General Counsel's 
recommendations to Train in early 1975, a Special Assistant to the 
Administrator initiated an ad hoc advisory group of interested agency 
officials, including Elkins and Stork. This group met only infrequently 
during 1975 and early 1976. It submitted its report to the Admin- 
istrator on June 2, 1976.^^ 

The "Ad Hoc Group on Conffict of Interest" advised the Admin- 
istrator that "there are no serious problems of conffict of interest 
within EPA as far as we have been able to determine." The existing 
minor problems, the group felt, could be remedied without basic change 
to the system. Accordingly, they recommended that employees be 
required to make a more detailed explanation concerning the relation- 
ship between their official EPA activities and their stock holdings. In 
addition, they recommended the establishment of an Administrator's 
Committee on Avoidance of Conflict of Interest, to be composed of 
senior managers, who would advise the Administrator, Agency 
Counselor, and Deputy Counselors on general policy questions. 

On the issue of a blanket "de minimis" exemption for relatively 
small stock holdings, the group was split. In April, 1974, the agency 
had proposed to the Civil Service Commission an exemption from 18 
U.S.C. § 208 for security holdings of $7,500 or less in a single industry 

32 Koller, Alice R., "The Scope of Conflicts of Interest at Regulatory Agencies," March 4, 1975 (Edited 
version.) 

33 Memorandum; Subject— EPA's Conflict of Interest Policies; To Russell E. Train, Administrator; 
From— Ad Hoc Group on Conflict of Interest, dated June 2, 1976. This memo-report discusses a number 
of conflicts issues. 



22^871—78- 



20 

and for stock holdings where the number of shares did not exceed 1% 
of the outstanding shares. More than one jesir later, on May 5, 1975, 
the General Counsel of the Civil Service Commission responded, 
claiming that EPA's original letter had not been received. The CSC 
General Counsel declined to approve the exemption, finding that 
^'(t)his sum may be a substantial holding for many emplo^'ees. ..." 
He also declined to approve the 1 percent exception, since for 'large 
companies, this exemption could be most substantial. . . ." 

The Ad Hoc Group reconsidered the ''de minimis" question but 
failed to reach a consensus. Stork and Elkins felt that a '^de minimis" 
exemption would be difficult to handle administratively and, further, 
that what was inconsequential (in terms of dollars) to one employee 
could be very important to another. Further, they were concerned 
that such an exemption could harm the public perception of EPA 
and that ''(t)he possible cost of such accusations to EPA and to 
individual employees is simply too large to take a risk." Others felt 
that such a rule would be acceptable and felt that the individual EPA 
offices could set a more stringent rule if they wanted. 

Administrator Train received the Ad Hoc Group's report and 
decided not to set a ''de minimis" level. He declined also to set up 
the recommended Administrator's committee, apparently believing 
that the current procedure was satisfactory. He did direct, however, 
that the disclosure form be modified to obtain better information. 
The new form (which was used for the annual report from each 
affected EPA employee due on June 30, 1977) requires emploN^ees to 
indicate affirmatively why the employee's stock holdings do not 
conflict with his or her official duties. The new form also requires, for 
the first time, an approximate dollar value of the stock. 

E. STOCK INTERESTS HELD IN 1977 — THE SUBCOMMITTEE'S REVIEW 

During March and April 1977, the Subcommittee conducted its 
own review of the financial interests statements, job descriptions, 
and actual duties of selected EPA employees to learn how well EPA's 
system of avoiding conflicts was actually working. The Subcom- 
mittee's review of EPA's system included an audit of some 435 finan- 
cial disclosure forms. We reviewed 71 forms filed with the ''Agency 
Counselor," including those of most of EPA's high level employees. In 
addition, we reviewed 364 forms filed with five "Deputy Coun- 
selor's" — in Pesticides Programs, Radiation Programs, Water Supply, 
the Office of Energy, Minerals and Industry Division, and in Mobile 
Source Air Pollution Control. We selected these five as a cross- 
section of divisions entailing both differing responsibilities and 
varying numbers of employees required to file. 

We found that 94 of the 435 forms reviewed showed ownership of 
stocks which presented or appeared to present conflicts. In 1976, for 
example, one former Assistant Administrator of EPA brought to the 
attention of the Deputy General Counsel the fact that he had inher- 
ited a portfolio that inchided one large holding in Union Pacific valued 
in excess of $15,000. This company has extensive coal interests and 
is substantially affected by the waste management programs assigned 
to this Assistant Administrator. The portfolio also included stock in 
Diamond Shamrock, Continental Oil, Goodyear, Southern Natural 
Resources, and Central Telephone, all affected by programs under the 



21 

Assistant Administrator. EPA's Apjoncy rounsolor rcrommended at 
the time, however, that the official need not divest.^* 

Another EPA emplo\'ee, head of an analytical section in the Office 
of Pesticide Programs, owned stock in three oil companies — Texaco, 
Exxon, and Gulf — with a total value exceeding $10,000. All three 
produce pesticides. A deputy counselor reviewing these holdings deter- 
mined that there was no conffict because the employee was not in a 
position to influence decisions, an assertion which we concluded, on 
further investigation, was highly suspect.^^ 

The Subcommittee's review of EPA's files confirmed the findings of 
a 1975 EPA internal review, conducted by G. William Frick, then 
both EPA's General Counsel and the ''Agency Counselor" on conflict- 
of-interest questions. Frick, in a memo to EPA's 40 Deputy Counselors 
stated: ^® 

In my review, I have noted several instances where it appears that there clearlv 
must be a conflict between the employee's duties and certain stocks that he or she 
owns. I will be getting in touch with the appropriate Deputy Counselors to discuss 
those situations. 

This statement was pursued in Subcommittee hearings on May 23, 
1977:^7 

Mr. Dodge. [Subcommittee Counsel] My question is this: What specific steps 
did EPA take at that time to follow up on these situations? 

Ms. Blum [EPA Deputy Administrator] Mr. Chairman, may I have Mr. Frick 
answer this since this is his memo? 

Mr. Moss. Yes. 

Mr. Frick. [EPA General Counsel at the time of the hearings] With respect to 
the basic problem of whether the statement reflects a holding which may or may not 
conflict, we have revised the format of the reporting form. It now requires further 
information from the individual employee. It is the burden of the employee to 
indicate the nature of their holding, the nature of their official duties, and to indi- 
cate what is there — so we have an idea of v/hat the company does as well as what 
they do and can make the determination whether they would be involved in any 
particular matter involving that company. 

So, we have attempted to correct the procedural problem which I was attempt- 
ing to identify. 

With respect to the individual cases, we attempted to follow this up with the 
individual Deputy Counselors. It was mainly done orally. I do not have records. 
I do not recollect exactly what the disposition of these was. 

Again, some of those I am sure were resolved by the Deputy Counselors. As you 
point out in the report, in EPA we have a system whereby we have Deputy Counse- 
lors who do the m.ain work with the individual employee. 

Mr. Dodge. Have you undertaken since the time of this memorandum of June 
1975, Mr. Frick, any subsequent audits of the type you undertook here when you 
first took over the job? In other words, do we know now any better than we did then 
the extent to which there exists at EPA the sort of conflict that you found in your 
1975 review? 

Mr. Frick. No; I have not done any further investigation. 

Mr. Dodge. Do you view it as within the role of the Agency Counselor to per- 
form periodic audits to find out whether or not the 40 Agency Counselors are doing 
their jobs? 

Mr. Frick. Obviously, it is the job of the Agency Counselor, as assisted by the 
Office of General Counsel to monitor compliance. 

The discovery during the Subcommittee's 1977 review of wide- 
spread conflicts strongly suggests that periodic monitoring by the 
Agency Counselor is essential if EPA's system is to \york efficiently. 

*< The treatment of this situation by EPA's Agency Counselor is discussed further in Hearings, pp. 77-?0. 
35 Further details on these examples, plus three additional case studies, are presented in Appendix V(b) 
of this report. 
38 See Hearings, pp. 57-58 for full text of Frick memo, dated June 6, 1975. 
*' Hearings, pp. 58-59. 



22 

F. RECENT EFFORTS TO IMPROVE EPA's SYSTEM 

As a result of this Subcommittee's investigation and hearings, EPA 
has recently made some efforts to improve its conflict-of-interest 
system. Barbara Blum, Deputy Administrator of EPA, described 
some of the possibilities in her testimony before the Subcommittee: ^^ 

At present, we are in the process of rewriting the 1973 regulations and tightening 
them up. We already have a draft copy of that. The final should be out for review 
within two to three weeks. 

We are going to have that reviewed by a special committee which is going to be 
appointed this week. It is going to l)e the Administrator's Committee on Avoidance 
of Conflict of Interest. What this committee would do would be to provide the 
process and the beginnings of adequate guidance for i^rohibited stocks. It will look 
into better mechanisms for foUowthrough. 

We are considering such concepts us special assistant to the administrator on 
ethics, a full-time person who would be watching conflict of interest. 

Another alternative to that might l)e a full-time attorney in the General 
Counsel's Office who works on nothing but ethics and reviews everything the 40 
Deputy Counselors do. I think it is important for them to see it and give a prelimi- 
nary review because they need to know the stocks held by their people. I think 
there needs to be a higher authority which looks at that in every single case. 

I even thought — and these are just possibilities — a full-time person working in 
security and investigations working on nothing but ethics. I think it would have to 
be an attorney. 

These would be alternates to the Deputy General Counsel serving as Agency 
Counselor. It would be somebody whose prime responsil)ility would be ethics. 

Subsequent to the hearings, Deputy Administrator Blum estab- 
lished a ''Committee on Conflict of Interest," with a membership 
virtually identical to that of the 1975-76 Ad Hoc Group. The new 
committee met initially on ffune o, 1977, to consider the extent to 
which EPA's confhct of interest system should be revised. New regu- 
lations, based on the Committee's final recommendations to the 
De])uty Administrator, have not been issued as of this writing (Janu- 
ary, 1978). 

G. CON'CLUSIONS 

(1) EPA has allowed a substantial number of its hifrh-level em- 
ployees to hold stock in companies reofulated by the a<rency. Numerous 
mid-level officials own stock in companies resrulated by the sections of 
the agency to which the emplo^'ees are assigned. 

(2) EPA's decentralized system for assessing conflicts of interest, 
combined with the failure of the Agency Counselor to monitor the 
decisions of the 40 Deputy Counselors on a regular basis, has been a 
partial cause of the agency's j)oor performance. 

{:]) EPA has failed to give adequate advance guidance to its em- 
j)loyees as to what stocks or other interests they should not purchase. 

(4) EPA has allowed widely different standards to ap|)ly in different 
parts of the agency without stating a clear policy justifying different 
standards. 

(5) The two divisions applying a strict prohibition against owner- 
ship of financial interests in com])anies regulated by these divisions 
have found it |)osslble to enforce such a standard without significant 
hardshi])s on individual employees. 

5* Hearings, pp. 72-73. 



23 

H. RECOMMENDATIONS 

(1) EPA should ostahlisli a ponnanont Adniinisfraloi's C^ommitteo 
which would audit the decisions of tlie Deputy (.V)uns('h)rs or of any 
alternative system establislied to ^eplac(^ the Deputy (younselors. 

(2) EPA should |)i-epare a list of ''prohibited stocks" for the aixency 
as a whole and for each se|)arate division of the a<^ency. 

(3) EPA should circidate to its ein|)loyees a booklet on conflicts 
])robleins, written in simple En<i:lish (<2:oin<^ beyond a mere recitation 
of the statute and the re<r:ulations) which would explain their respon- 
sibilities. 

(4) EPA sliould determine whether different divisions need difl'er- 
cnt conflicts rules. If so, a clear j)olicy should be enunciated. If not, 
it shouUl establish and enforce a single standard throughout the 
agency. 

(5) In any event, EPA should extend to other program offices and 
divisions systems similar to those now in force in Mo})ile Source Air 
Pollution Control and the Office of Noise Abatement (Jontrol, includ- 
ing well-defined prohibitions on ownership of stock in companies 
affected by the programs of thos3 divisions. 



CHAPTER 5 

Conflicts of Interest: Special Government Employees at 
THE Food and Drug Administration 

A. background 

The Food and Drug Administration is part of the Department of 
Health, Education, and Welfare. FDA enforces the Federal Food, 
Drug, and Cosmetic Act ^^ and other related laws. FDA's mandate 
is to ensure that (1) food is safe and wholesome, (2) drugs, biological 
products, therapeutic devices, and diagnostic products are safe and 
effective, (3) cosmetics are safe, (4) the use of radiological products 
does not result in unnecessary public exposure to radiation, and (5) 
all of these products are honestly labeled. 

To carry out its mandate, FDA has augmented its regular full-time 
staff of just under 7,000 with approximately 900 experts and con- 
sultants, drawn mostly from universities, hospitals, and other govern- 
ment agencies. These experts are officially designated as Special 
Government Employees (SGEs).*° FDA believes it is impractical to 
maintain full-time, in-house expertise in all of the substantive fields 
required for effective implementation by FDA of its diverse programs. 
These programs require consultant participation that is often inter- 
mittent, but of high priority. About 500 SGEs serve as members of 
FDA's 67 public advisory committees. Although these groups are 
advisory, FDA places heavy reliance on their recommendations.^^ 
Because most of these committees are critical components of FDA's 
regulatory process, it is important that their deliberations be free 
from both bias and conflicts of interest. 

However, the attributes that make SGEs valuable also creato 
conflict-of-iuterest problems. Those who become specialists in a 
narrow field can readily develop knowledge of investment oppoTtuni- 
ties in that field, and are often active in develc})ing, producing, and 
marketing new products or techniques. As a result, many SGEs have 
employment or financial interests in FDA-regulated industries. 

A General Accounting Office report issued in January 1977 ^^ 
was critical of FDA's system for avoiding conflicts of interest among 
its SGEs. The GAG study cited problems with FDA's general pro- 
cedures for SGEs, but stopped short of determining the extent of 
actual confficts of interest. The Subcommittee decided to look further 
into FDA's system for protection against conflicts of interests in- 



39 21 U.S.C. 341 f< Sf7. 

<« SCiEs arc defiiiod in 18 U.S.C. 202(a') as employees who are retained. desiRna(ed, appointed, or em- 

Eloyed lo perform will) or without compensation, temporary duties, either on a full-lime or intermittent 
asis for a period of not more than 130 days during any jieriod of 36') consecutive days. 
<' See Ileal in^s, p. 111. In response to a question from .Mr. Moss, the FDA is able to cite only a handful 
of instances in which l-'DA's action was not consistent with advi.sory committee recommendations. 

<2 "The Food and DruK Administration's Financial Disclosure System for Special (lovernment Em- 
ployees: I'ro;/ress and Proi)lems," Ueport to the ('onpress, .Inn. 24, I'.tTT, 1- l'CD-7f^ IM). The report had been 
requested in a letter from Chairman Moss to Comj)lro!lcr Cienerul Staats, dated May 18, lyTti. 

(21) 



,25 

volving SGEs to determine whether actual conflicts have been 
permitted to exist. '^^ 



Prior to January 1976, FDA made conflict-of-interest decisions for 
SGEs on a case-by-case basis, applying the Federal statutes and 
HEW's regulations.'''^ In January 1976, the Agency issued a Staff 
Manual Guide which, among other things, listed outside activities 
and financial interests that would be prohibited or limited for SGEs 
during FDA employment. 

The January 1976 Guide restricted an SGE's ability to serve on 
projects that affected companies with which he had investment inter- 
ests, grant or contract arrangements, or an employment relationship. 
SGEs with financial interests exceeding $2,000 in a regulated firm,^^ 
or who had been employed by or received any grants or contracts fund 
from a firm during the preceeding year, were prohibited from par- 
ticipating in matters involving that firm. Any such restriction applic- 
able to an SGE had to be recorded for internal agency management 
purposes on form HEW-410 (''Supplemental Information — Expert or 

Consultant").*^ 

Further, if (1) an SGE's financial interest in a firm exceeded $10,000, 

(2) his employment during the preceeding year exceeded $1,000, or 

(3) his grants or contracts during the preceeding year exceeded $5,000 
from any one firm or $25,000 from all firms, then, not only would he 
be prohibited from participating in matters aftecting that firm, but he 
would also be required to make public disclosure of the interest. 

To accomplish such disclosure, the guidelines required the comple- 
tion of a special form. These forms, unlike the confidential forms 
HEW-410, were placed on public view, in the FDA's Public Records 
and Documentation Center (PRDC), and were dubbed 'TRDC 
memos." *^ 

In October 1976, FDA issued a revised Staff Manual Guide and 
adjusted the amounts of financial interests requiring disclosure.^ An 
SGE must now disqualify himself from any participation involving a 
firm if (1) he owns more than $1,000 in financial assets in the firm, 
(2) his employment fees from the firm exceeded $1,000 in the past 
year, or (3) he received any grant or contract support from the firm 
in the past year. A PRDC memorandum is now required if an SGE's 
investment, employment, contracts, or grants exceed $5,000 from any 
single firm. FDA considers only the preceding 12 months in assessing 
outside interests for the purpose of establishing restrictions on par- 
ticipation and deciding whether public disclosure is appropriate. 

FDA's Associate Administrator for Administration, whose respon- 
sibilities include administration of FDA's conflicts program, believes 
that m aking public the details of financial interests and of restrictions 



« The Subcommittee assessed FDA's financial disclosure system for regular employees in its report 
"Federal Regulation and Ptegulatory Reform," (House Document 95-134, Oct. 1076. pp. 314-318) and in 
hearings conducted during the 94th Congress. An "Interim Staff Report," entitled "ICxtent of Deficiencies 
in the Financial Disclosure System for FDA Employees," was presented at hearings on Mar. 19, 1976. See 
Regulatory Reform Volume II. Serial 94-81., pp. 605-610. 

" These regulations appear at 45 C.F.R. Part 73. 

45 This $2,000 rule applied only to advisory committee members. Any investment, whether valued above 
or below $2,000, would disqualify an SGE from being an exnert or consultant for FDA. 

4^ A sample form "HEW-410" is contained in Appendix VI. 

<^ A sample "PRDC Memo" is contained in Appendix "\^I. 

43 Excerpts from the Guide are reproduced in Appendix VI, 



26 

on participation has a "cleansing effect," and removes any taint on 
the service of SGEs with outside interests. ^^ Measures available to 
FDA for its regular emploA^ees, i.e., job reassignment or divestiture of 
interest, are not, in this officials' view, appropriate for SGEs, since 
their period of service to FDA is limited and FDA is not their principal 
employer.^^ 

Where an SGE is being considered for reappointment and has 
acquired a financial interest subsequent to the date he originally 
began service, FDA believes public disclosure is often the only way, 
short of terminating the employment of the individual, to resolve 
the problems of an apparent conflict of interest. FDA's stated policy 
on initial appointments is to avoid hiring, where possible, individuals 
with interests that require issuing a PRDC memorandum. FDA 
liberally grants exceptions to this policy if the available manpower 
in a particular field is limited to a few individuals, none of whom can 
meet FDA's guidelines. 

C. SUBCOMMITTEE REVIEW AT FDA 

To assess FDA's efforts to prevent advisory committee members 
from participating in prohibited matters, the Subcommittee staff 
[reviewed numerous documents, including the 104 PRDC memos] 
on file at the time of the stud}^ additional SGE case files, minutes and 
transcripts of advisory committee meetings, letters, memoranda, and 
other pertinent data. The Subcommittee staff also interviewed re- 
sponsible FDA officials, including four Executive Secretaries who 
presided over advisory committees,^'' and attended select advisory 
committee meetings. 

One of the Subcommittee's case studies is illustrative of FDA's 
problems addressing conflicts of interest among its SGEs.^^ The case 
involves a member of FDA's National Advisory Food and Drug 
Committee. He is the President of Fair Farms, a large scale animal 
feed lot operation in Colorado.^^ He was appointed to the Committee 
in May 1976, a year after the committee was designated by FDA 
to review the routine use of several antibiotics in animal feed.^* 
Antibiotics are widely fed to animals in feedlots to prevent and reduce 
infection and to promote growth. Drugs such as tetracycline, for ex- 
ample, are fed at low, so-called "sub-therapeutic" levels to all, or nearly 
all, cattle in feedlots. This use of antibiotics is now being questioned 
because it may reduce the efFectiveness of the antibiotics in humans 
who have been consuming meat from treated cattle. 

The Advisory Committee created a subcommittee to study the 
problem. The subcommittee, which did not include the feed lot presi- 
dent, recommended to the committee in January 1977 that the use of 
tetracycline and penicillin at sub-therapeutic levels in animal feed 



" FDA's Associate Adminislrator for Administration is Gerald F. Mej'er. Comments are from the staff 
interview with Mr. Meyer on Jan. 18, ITil. 

w Ibid. 

61 The four executive secretaries we interviewed preside over 10 of the FDA's 67 public advisory com- 
mittees. 

« The case came to our attention during an Investigation conducted jointly early in 1977 by the Sub- 
committee and by the Genrral Acconntiiig Otlicf'. into FDA's etToits to repiilate the use of antibiotics in 
animal feeds. The (}A0 report on the inv» slifiation is entitled, "Need to Establish Safety and Effectiveness 
of Antibiotics Used in Animal Feeds," No. lIRD-77-81, June 27, rJ77. The conflict-of-interest aspect of 
the investiRation is di.<^cussed on pages 38-4(5 of that report. 

«»The President of Farr Farms is William D. Farr. [Mr. Farr's name appears in the GAO report and in 
the record of the Uearlnc of Serjt. 23, 1977, infra, note ,54.1 

"AocordlnKtothf'testiinony of Donald Keimedy. Mr. Fsrrdid not partieipateinthocommittee'smeetinjrs 
until January 1977. "Antibiotics in Animal Feeds," hearings before the Subconmiiltee on Oversight and 
Investigations, SeiJt. 23, 1977, p. 101, 



27 

be discontinued. At its meetin.f^ on Jjimnuy 24, 1977, th(^ Xationnl 
Advisor}^ Food and Dvu^^ Connnittce voted to overturn tlie reeoin- 
mendation of its own subconiniittee with respect to tetracyclines, 
and urged that FDA continue to permit the use of the terracychne in 
animal feed, both for growth promotion and disease prevention. The 
president of Farr Farms took an active role in the discussion of this 
recommendation, and seconded the motion to overtin-n tUo recom- 
mendation of the subcommittee. Staff of the Oversight and Investiga- 
tion Subcommittee and of the General Accounting Ofhce vi.^itcd Farr 
Farms and interviewed its president, who stated that liad Ik^ been 
advised of the potential conflict he would not have participated in the 
deliberations on antibiotics. He stated that FDA had not informed 
him of the conflict-of-interest laws and regulations. 

At subcommittee hearings, FDA Commissioner Donald Kennedy, 
who took office after these events, acknowledged that the i)articipation 
of the president of Farr Farms in the deliberations on tetracyclines 
was "wTong." He said the blame rested with FDA and not with the 
member, and assured the subconnnittee it would not happen again.''^ 
FDA has since rejected the Advisory Committee's recommendation on 
tetracycline. 

This and other case studies point to several problems with the 
FDA's conflicts system that remain unresolved. 

1. FDA's exemption oj so-called Generic Proceedings from its nonpartici- 
pation rules 

Normall}^, FDA will employ a prospective advisory panel member 
with financial interests on the condition that the panel member agree 
to withdraw from participating in matters related to his interests. 
However, FDA does not apply this rule to ''generic proceedings," 
which are proceedings that affect every product in a class in the same 
manner. Generic proceedings include, for example, the development 
of guidelines and policies affecting groups of products or placing 
product groups in various regluatory classifications. FDA has 40 
advisory committees that review drugs, medical devices, and biological 
products on a generic basis. These advisory committees represent 
60% of FDA's total number of advisor}'- committees. Under FDA's 
policy, for example, a consultant may retain a major interest in Bristol 
Myers, and participate freely in a matter affecting the company or 
one of its products so long as competitors are affected in the same way 
by the proceedings. FDA bases this policy on its assertion that be- 
cause these proceedings do not favor any one paiticular product over 
another, they are not ''particular matters" as contemplated by the 
conflict-of-interest statures (18 U.S.C. 203, 205, and 208).^^ 

The case of tetracycline and Farr Farms, described above, is an 
example of FDA's policy on generic proceedings. Prior to Commis- 
sioner Kennedy's confession of FDA error in that instance, the FDA 



^ Mr. Kennedy was not prepared to agi"ee, however, that the situation was an instance of participation 
by an advisory panel member in a "particular matter," as prohibited under 18 U.S.C. 208. Hearings, supra 
note 54, at pp. 100-101. 

59 The part of 18 U.S.C. 208 which inclvides the words in question reads as follows: "... including a special 
Government employee, participates personally and substantially as a Government oflicer or ercployee, 
through decision, approval, disapproval. reccmir;er.dation, the rendering of advice, investigation, or ether- 
wise, in a judicial or other prrceeding, application, request for a ruhng or othfr determination, contrect, 
claim, controversy, charge, accusation, arrest, or other parUcular matter." [Emphasis Added.] 



22-871—78 5 



28 

had sought to defend the participation of the President of Farr Farms, 
on the ground that all other feed lots using tetracycline would be 
similarly affected. Since no competitive advantage resulted for Farr 
Farms, FDA asserted, the participation of its president in this decision 
would be in accord with the applicable statutory provisions. 

A second Subcommittee case study, involving a member of the 
Panel on Review of Cardiovascular devices,^" is also illustrative of the 
generic proceeding problem. As a university researcher, he had applied 
for and received a $140,000 grant from a company called New Dimen- 
sions in Medicine. The grant was to investigate the efficacy of a device 
called an electrosurgical electrode ^^ made by New Dimensions. The 
panel member informed FDA of his involvement in the compan}'"- 
supported research at the university, and agreed not to participate in 
panel matters involving New Dimensions in Medicine. 

However, electrosurgical electrodes came before the panel for review 
and classification (a generic proceeding) ^^ in April 1977. FDA's 
Executive Secretary for this panel knew in advance that the matter 
would arise, that the panel member was financial 1}^ interested in the 
outcome, and that a Subcommittee staff member would be attending 
the meeting. Nonetheless, the Executive Secretary permitted the 
member to participate, and the panel member did so. 

FDA's exemption of generic proceedings from its rule prohibiting 
participation, as showTi in these examples, finds no support in the 
language of 18 U.S.C. 208. The statute makes it clear that "particular 
matter" refers not to a particular product (the interpretation on 
which FDA's program is based) but to a particular question or decision 
before the agency .^^ 

Thus, a decision affecting a group of products is clearl}' covered 
by the statute. The test set forth in the statute is not whether a 
decision would favor one product over another, but simply whether 
a decision in any way affects the financial interests of the employee 
or special government emplo3^ee in the company marketing the 
particular product. 

In our view, both the tetracycline matter and the classification 
of electrosurgical electrodes were discrete and particular decisions 
clearly impacting on the companies in question, and were therefore 
covered under 18 U.S.C. 208. Repeated efforts by this Subcommittee, 
in letters, meetings, and in open hearings have thus far failed to 
persuade FDA that its policy on generic proceedings does not comply 
with the statute. FDA continues to run its SGE program as it wishes 
in this respect, disregarding the clear language of the law. 



*■ The Panel, which reports to the Bureau of Medical Devices and Diapnostic Products, reviews and 
evaluates all available information concerning the safety, elTectiveness, and reliability of medical devices 
currently under the authority of this panel in order to determine the nature of the rejrulatory category most 
appropriate for th'» aderjuate control of these devices. The panel attempts to identify i)roLlenis and recom- 
mends specific standards for those devices which can best be controlled and regulated by established stand- 
ards. 

i* An electrosurgical electrode is a medical device used, in conjunction with an electrosurgical device that 
transmits electrical current, to cut body tissue and coagulate bleeding blood vessels. 

M This panel recommends classification of groups of devices. There are three classes: (1) Class I— requires 
the manufacturers to comply with registration re(|uirements, good manufacturing practices, and other 
general types of regulatory requirements; (2) Class II— recjuires manufacturers to comply with performance 
standards when such standards are adopted by FDA; and (3) Class HI— retjuires manufacturers to submit 
data to FDA showing that their devices are safe and elTective. Thus the VDA decision on classilication 
carried substantial cost implications for each of the products included in a group subject to classificalion. 

soThe relevant statutory languagt; is set forth in note 5C, supra. See Appendix I of this Re|)ort for the 
full text of 18 U.S. (\ 208. 



29 

2. FDA's Jailure to screen potential confllct-oj- interest problems 

Prior to an SGE's ai)poiiitinenl or roappoiiitiiKMit, FDA's Director 
of Policy Management conducts a review of the file and detenninos 
whether a conflict of interest exists. If he identifies potential con- 
flicts, he can select from two alternatives: he may reject the ap])licant, 
or he may appoint him subject to restrictions on ])artici})ntion in 
FDA activities that involve a conflicting interest. If the Director 
decides to approve the appointment, he nuist make an additional 
decision. Depending on the size of the financial interest in question, 
he must either impose restrictions on participation ord}', or, in the 
case of larger interests he must, in addition, ie(piire the appointee 
to make public disclosure of his potentially conflicting interests. 
In the period between January 1976 and February 1977, the Director 
rejected only six applicants while, in the same period, he required 
the issuance of public disclosure memoranda for 80 ap[)licants who 
were hired by FDA despite their sizable holdings posing i)otential 
conflicts. Also, during the sam^e period the Director placed partici- 
pation restrictions alone (without requiring j)ublic disclosure) on 
numerous other SGEs Avith less substantial potential conflicts. Thus, 
relatively few applicants were screened out, compared to the number 
with significant potential conflicts who were hired. 

Similarly, for SGEs screened by the Bureau of Drugs, which 
hires more SGEs than any other bureau in FDA, oidy three ai)pli- 
cants of approximateh' 140 during calendar year 1976 were rejected. 
FDA officials pointed out to the Subcommittee staff that some candi- 
dates with obvious conflicts are screened out at an earlier stage in 
the hiring process, but FDA does not keep data on such rejections. 

The Subcommittee also looked at FDA's handling of reappoint- 
ments of SGEs who acquire actual or potential confficts subsequent to 
their initial emplo3anent. Not surprisingly, we found that the agency 
rarely screens out SGEs with newly-acquired potential conflicts at 
FDA. Four of the Subcommittee's five FDA case studies involved 
SGEs who during the course of FDA employment, acquired a 
conflicting interest in a regulated firm. 

FDA's Associate Commissioner for Administration explained to 
the Subcommittee staff that FDA has too much invested in its SGEs 
to terminate their employment merely because a conflicting interest 
is acquired. FDA maintains that it is better simply to restrict the 
])articipation of persons Avith a potential conflict of interest, and, 
for those cases involving an excessive interest in the regulated indus- 
try, to require public disclosure of the facts or individual holdings. 
It is clear that FDA's basic attitude is to accept the conflicts that 
inevitably seem to accompany the persons FDA recruits for advisoiy 
committee membership. 

5. FDA's difficulties in enforcing promises of nonparticipation 

Restrictions placed on an SGE excluding him from participation 
in certain matters are duly recorded on form IIEW-410, '' Supple- 
mental Information — Expert or Consultant." This form is then 
supplied to the executive secretary of the appropriate advisory 
panels. It is the responsibility of the executive secretary to ensure 



30 

that committee members do not participate in matters in which 
they are financially interested. 

The four executive secretaries the Subcommittee staff interviewed 
told us that it is sometimes difficult for them to enforce the restrictions 
on participation that are noted on the forms. They stated that 
not all the form 410s are complete and up-to-date. In such cases the 
executive secretaries must rely on the committee members to state 
voluntarily when a product or company in which they have an interest 
is presented for discussion. One executive secretary stated that it is 
general!}^ left to the advisory committee members themselves to be 
aware of instances in which conflicts might arise. 

The executive secretaries serving the advisory committees that 
review products on a generic basis believe that if FDA were to reverse 
its polic}^ and extend its non-participation rule to generic proceedings, 
conflicts would be even more difficult to identify when confficts arise. 
The executive secretaries do not always know which firms are affected, 
since discussions dealing generically with products do not always 
contain references to individual company or brand names, and FDA 
does not maintain any listing of manufacturers of specific products. 

The executive secretaries also explained that the meeting agendas 
are too general to be useful in helping them anticipate potential 
conffict situations that might arise at future meetings, and that, in 
any event, the agendas may be changed until the day before the 
meeting. 

Finally, it should be noted that a further problem affects the non- 
participation system. If applied consistently and vigorousl}^ the 
system could lead to its own undoing. To hire consultants and experts 
mth outside financial interests and then to prevent them from partici- 
pating in a great number of matters could make the usefulness of 
SGEs marginal, and render the program quite wasteful.^^ This prob- 
lem in turn raises a basic question: if the operation of conflicts is 
unavoidable in the use of SGEs, should FDA rely on them at all, 
and what alternatives does FDA have? In the Subcommittee's view, 
if FDA is to continue its reliance on advisor}^ committees composed 
of SGEs, it must, at a minimum, devise workable ways of avoiding 
the dii'ect involvement of SGEs in decisions in which they are finan- 
ciall}^ interested, so as to bring FDA's SGE program into compliance 
with 18 U.S.C. 208. 

J+. The pvMic disclosure system 

FDA's belief that the potential for harm from allowable conflicts is 
diminished by public disclosure of the interests in question seems ill- 
founded. FDA accomplishes ''public disclosure" hy placing the finan- 
cial interest information and a description of any restrictions on 
participation in a document center open to the public. The system, 
which IS not popular with the SGEs, would probabh^ prove unaccept- 
able if made more effective, such as by providing notice of the avail- 
ability of this information in the Federal Register and providing, as 
recommended below by the Subcommittee, an in-house mechanism 
for citizen challenges of appointees whose financial statements disclose 
a possible bias. 

•> FDA spent $1.4 million for the services of SGEs in fiscal year 197(3 (July 1, 1975 through June 30, 1976). 



31 



D. CONCLUSIONS 



Several conclusions follow from our analysis of the interviews, case 
studies, and related documents: 

(1) FDA rarely screens out applicants with reported coufhcts, 
preferring instead to employ them, subject only to the requirements 
of nonparticipation and ])ublic disclosure of the i)otential confhfts. 

(2) The requirenient that SGEs not i)articipate in ruatters related 
to their personal financial interests is not well enforced, even in pro- 
ceedings which FDA agrees are covered b}^ the statutes and regulations 
requiring nonparticipation. 

(3) FDA's policy suspending the nonparticipation rule in proceerl- 
ings aflecting a group of products on a generic basis does not comply 
with 18 U.S.C. 208. 

(4) FDA's public disclosure system covering certain larger financial 
interests of SGEs is weak and fails to have the cleansing effect claimed 
for it by FDA. 

(5) FDA has apparently no interest in reducing its reliance on 
conflict-ridden advisory committees, and seems to accept as inevitable 
the high level of potential conflicts inherent in the SGE advisory 
council system. 

(6) FDA has provided no s^^stem for citizens to challenge SGEs as 
financially biased. 

E. RECOMMEXDATIOXS 

(1) FDA should place much greater emphasis on screening out 
SGEs with conflicts or potential conflicts. 

(2) FDA should abandon its wholly untenable policy exempting all 
generic proceedings from its usual rules on nonparticipation. Generic 
proceedings can and do affect the personal financial interests of SGEs 
now permitted to participate. FDA should allow participation only 
when an SGE can make a positive showmg that his interests are not 
affected. 

(3) If FDA plans to continue disclosing publicly the interests of 
certain SGEs, it should make its disclosure system more effective, 
through wider dissemination of the information than is current!}' the 
practice. In addition, it should provide an administrative mechanism 
for citizen challenges to the hiring of SGEs with conflicting interests. 

(4) The FDA should review its basic assumption that advisory 
panels whose members constantly face conflicts problems are preferable 
to s^^stems less reliant on advisory panel input. 



CHAPTER 6 

Role of the Civil Service Commission 

a. background 

The Civil Service Commission is charged, under Executive Order 
11222/- issued in 1965, with specific responsibility to ensure the main- 
tenance of high ethical standards among Federal officials. The Execu- 
tive Order gave the Commission the authority to issue regulations 
implementing the principal provisions of the order. The Civil Service 
Commission issued regulations in 1968,^^ and many agencies then 
copied them essentially verbatim, without attempting to tailor pro- 
grams meeting their particular needs. 

The Commission is also assigned responsibility for reviewing agency 
regulations to ascertain their conformance with the Executive Order 
and for screening the financial interest statements of Presidential 
appointees, including the commissioners of regulatory agencies. 

B. review OF commissioners' statements 

To review the performance of the Civil Service Commission in 
monitoring the confidential financial statements of regulatory agency 
commissioners, the staft' analyzed the 1974, 1975, and 1976 financial 
disclosure statements of 53 commissioners for the seven independent 
Commissions under the subcommittee's jurisdiction.^* Among the 53 
commissioners (a select and relatively small group with whose finan- 
cial holdings the Civil Service Commission ought surely to be most 
concerned) we found one instance of clearly prohibited stock holdings 
in a case involving a Commissioner of the Federal Communications 
Commission. ^^ 

In 1974, 1975, and 1976, the Commissioner reported o\\mership of 
the following three stocks to the Civil Service Commission: Martin 
Marietta Corporation, Pennzoil Corporation, Gladding Corporation. 

The total value of these holdings in May 1977 was about $23,000. 
Martin Marietta produces communications systems; Pennzoil is part 
owner of a company that provides communications services to air- 
lines; and Gladding makes CB radios. All three stocks had been placed 
on the FCC's list of prohibited holdings by FCC's Office of Executive 
Director — Pennzoil and Gladding in 1974 and Martin Marietta in 1975. 
Accordingly, employees owning stock in any of these companies have 
been ordered, since 1974 and 1975 respectively, to divest. 



«- Til'' full text of Exftcutivo Order 11222 is presented in Appendix H. 

«J The. Civil Service Commission regulations appear as Appendix III. 

"< The seven are: the Consumer I^roduct Safety Commission, the Federal Communications Commission, 
the F'f^deral Power Commission, the Federal Trade Commission, the Interstate Coimnerce, Connnission, 
the Nuclear Regulatory Commission, and the Securities and Exchange Conmiission. 

0^ The Subcommittee did not identify the Commissioner, James Quello, prior to the May 23 hearinp;. 
Ifowever. at the hearing, Mr. (Quello himself stepped forward, and acknowledged his ownership of the 
stocks in (juestion. Ho reported later to us that he promptly sold all of the stock. 

(32) 



33 

Questioning of Civil Service Commission officials on tliis matter 
at the Subcommittee's June 2, 1977 hearing explored tlie Civil Service 
Commission's failure to identify these prohil)ite(l iioldings.'^* 

Mr. Rosenberg [Subcommittee Counsel]. You understand that 4(1)) [Section 
4(b) of the Communications Act of 1934] has been interpreted to reach any 
communications or communications-rehited stocks? 

Mr. Reich [Civil Service Commission Ethics Counsel]. That is correct. 

Mr. Rosenberg. But you did not ask the Ferleral Communications Commis- 
sion whether there was any listing of stocks that were prohibited; is that correct? 

Mr. Reich. No; I saw no particular reason. 

Mr. Rosenberg. And you saw no reason to feel that there might be such a list? 

Mr. Reich. No; I had no idea of such a list. 

Mr. Rosenberg. Chairman Campbell mentioned, I think, before that there 
were some agencies that had prohibited stock lists. Were you aware of other 
agencies that had prohibited stock lists? 

Mr. Reich. None specifically — yes, one. The Federal Power Commission, a«> 
a result of activities, now has a computerized study — I think it is the Federal 
Power Commission — of various companies that might ))e affected by their work. 

[Note: Following the hearing the Chairman of the Commission informed the 
Subcommittee: "At the hearing I was under the mistaken impression that the 
Commission received lists of prohil^ited stocks maintained by other agencies. 
This is not so. We have not received any list nor do we know of any except that 
of the Federal Communications Commission which we learned about at your 
Su]:)Committee hearing."] 

4i ♦ « * * 

Mr. Goodman [Civil Service Commission General Counsel]. Mr. Rosenberg, 
I think it fair to say that we have a situation here where you have a commissioner 
who had securities on a prohibited list that he was not permitted to have by 
statute, as I understand the situation, that they were on a statement that was 
tiled with the [Civil Service] Commission, and that the Commission did not, in 
fact, discover that fact and accordingly approved the statement. 

I do not think there is any question about that. 

These things happen in life. I think none of us are happy about it. We would 
hope that these things would not happen in the future. Obviously, efforts should 
1)6 made in that regard. "^^ 

Following the hearing, the Federal Communications Commission 
sent its prohibited list to the Civil Service Commission. This case, 
however, exemplifies the all too characteristic lack of vigor of the 
Civil Service Commission's efforts. 

C. REVIEW OF ETHICS PROGRAMS AT OTHER AGENCIES 

While the Commission lacks direct enforcement authority over 
other federal agencies in conflicts matters, it can audit an agency to 
ensure that the agency's i)rograms and policies are consistent with 
the requirements of Executive Order 11222.^^ 

However, the Commission's review efforts have been weak. Begin- 
ning in late 1974, the General Accounting Office (GAO), at the re- 
quest of Congress, issued a series of more than 20 reports on the 
agencies' performance in policing possible conflicts.^^ Those reports 
showed a pattern of lax enforcement and failure even to set conflicts 
standards at many of the agencies. At that time, the Civil Service 
Commission had no stafi' or office to address these findings. The Com- 



6* Hearings, p, 155. 

"7 Hearings, p. 158. «. . , v, 

»« We are not referring here to an audit of the financial interest files of individual agency officials but to 
a more general audit of the adequacy of an agency's programs, practices, and procedures designed to avoid 
conflicts and/or apparent conflicts. 

«» The full list appears in Hearings, pp. 147-148. 



u 

mission responded in early 1975 by hirins: a full time ''Ethics Counsel" 
in the Office of the General Counsel. While the Ethics Counsel had 
made attempts to educate the ''ethics counselors" in other agencies 
through a series of conferences, he has not undertaken an}- Signifi- 
cant auditing of the agencies' performance or policing for financial con- 
flicts of interest, and has not systematically followed up on the GOA 
findings. 

The present and past actions of CSC were described at the Sab- 
committee's hearing by Carl Goodman, General Counsel of the CSC:'° 

Mr. Goodman. Mr. Rosenberg, I think it is f?ir to say that the Commission 
has not taken some more aggressive steps in that regard. I think it fair to say that 
in 1975 the Commission began to take some more aggressive steps in that regard. 

I think it is also fair to say that more aggressive steps can be taken than those 
that were taken at that time. 

Common Cause, the citizens' lobby group, assessed the efi'orts of 
the Commission since 1975. Common Cause President David Cohen, 
addressing this point in testimony before the Subcommittee, stated:'^ 

Review by the Civil Service Commission of the line agency enforcement of 
conflict regulations is virtually non-existent. This is not surprising given that the 
Commission had only one attorney devoted to ethics matters for the entire 
Executive Branch during fiscal years 1976 and 1977. In a recent Freedom of In- 
formation Act request to the Office of General Counsel, Civil Service Commission, 
Common Cause requested copies of the entire written output of the Counsel's 
office on ethics matters for 1975-76. The response indicated that the CSC had no 
budget specifically allocated to ethics; that the CSC had no information on other 
agencies' budgets; and that the written ethics material (i.e., the interpretations, 
general guidelines, etc.) generated by the CSC was minimal. 

The Civil Service Commission has failed in the past to play a meaningful role 
in ethics matters. 

Mr. Cohen continued: 

Nevertheless, as we have analyzed the ethics enforcement and administration 
issue, we have come to the conclusion that a fundamentall}'' revitalized Civil 
Service Commission must be the basic vehicle on which to build a sound Executive 
Branch conflict-of-interest system. The CSC can only play an effective oversight 
and enforcement role in our view if it is restructured internally, if the President 
and his Commission appointees provide leadership, if the other components of 
the ethics system are revitalized, and if outside checks on the system are provided 
as well. 

D. GUIDANCE TO OTHER AGENCIES AND TO THE PRESIDENT 

The Commission's efforts to provide guidance to other federal 
agencies were found to be equally minimal, despite a wealth of inform- 
tion on specific weaknesses in agency programs offered in 21 sej^arate 
GAO reports on the subject issued between September 1974 and 
June 1977.^2 

The following testimony, from the Subcommittee's June 2, 1977, 
healing emphasizes this point: ^^ 

Mr. Rosenberg [Subcommittee Counsel]. I ask you whether you had done any 
formal analysis of those reports and submitted recommendations. Obviously, 
GAO— 

Mr. Goodman [CSC General Counsel]. I have not. 

Mr. LuKEN [mem])or of the subcommittee presiding]. Do you want to direct 
your question to Mr. Reich? 



" Hearings, p. lol. 

"' Iloarinps. p. 131. 

" The full list ai)ppars in llcariiigs, pp. 147-148. 

" Hearings, p. 149, 150. 



35 

Mr. Reich [CSC Ethics Coiinsc;!]. The GAG has estabhshod vory close liaison 
with our office. We, in turn, have been in touch with agencies where the necessity 

was there. 

♦ * * 4i 4i * * 

Mr. Rosenberg. It was not your general procedure, however, to do a formal 
analysis? It was simply a telephone call and sort of an offer of assistance? Is that 
correct? 

Mr. Reich. Well, I would say further 

Mr. Rosenberg. Is that correct? It was sort of an informal telephone offer of 
assistance for the most part? 

Mr. Reich. It was informal for the most part. But I say, where it was critical 
and there seemed to Ije a basis for it 

Mr. Rosenberg. Yes and 

Mr. Reich. I would correspond, for example, with the FA A. 

Mr. Rosenberg. Was the FAA the only example of that direct correspondence, 
based on the GAG report? 

Mr. Reich. Well, there was previous correspondence prior to the GAG report, 
for example, with the Department of Agriculture. As a result of that audit — 

Mr. Rosenberg. After the report, was there any formal correspondence with 
anyone beside the FAA? 

Mr. Reich. Not formal.^* 

The Commission has asserted that it lacks the authority it needs to 
supervise agency efforts to avoid conflicts, including enforcement 
authority. The conclusion of the Subcommittee is that the Commission 
had done very little to exercise the powers it has. The staff's conclu- 
sion parallels that of a GAO study giving the Commission very poor 
marks in monitoring agency compliance with the Executive Order.^"* 
The Commission has consistently assigned a low priority to its re- 
sponsibilities under Executive Order 11222. 

Finall}', the Commission has not exercised its assigned role under 
the Executive Order to advise the president on needed changes in the 
order. ^*^ It failed to do so during the period covered in our study, 
despite its own admitted need for additional enforcement authority. 
The one instance of advice provided to the White House by the Com- 
mission was in response to a request from the White House in April 
1976 relating to the acceptance of gifts b}^ federal ofTicials. The Com- 
mission recommended minor changes to the Executive Order "^ in that 
regard. 

The Commission points to a series of annual conferences it has held 
since 1975, bringing together the ethics counselors from numerous 
federal agencies to discuss conflicts issues, problems, and solutions. In 
a length}^ letter to the Subcommittee following the hearing,^* Civil 
Service Commission Chairman Campbell provided evidence of further 
communications with the agencies on conflicts matters. While these 
conferences and communications are a start at providing agency 
guidance, more is needed to make guidance efi'ective. 

E. COXCLUSIOXS 

(1) The Civil Service Com.mission has failed to review the perform- 
ance of other federal a2:encies. This failure has left agenc}' conflicts 



'* After the hearing, the Conmiission provided additional details on its "informal" foUowup efforts for 
each GAO report. See Hearings, p. 173-175. 

'5 "Action Needed to Make the Executive Branch Financial Disclosure System Effective," General 
Accounting Office, FPCD-77-23, Feb. 28, 1977. 

"6 Executive Order 11222, Section 701(c). 

" See Hearings, p. 161-2, for text of letter to the White House. 

■8 Hearings, pp. 172-175. 

22-871—78 6 



. 36 

regulations with little force and effect and has ensured that then* 
application lacks equity and consistency'. 

(2) Similarly, the Civil Service Commission has failed to take the 
initiative in providing guidance to other agencies in drafting regula- 
tions and in establishing programs to avoid conflicts problems. Recent 
efforts, begun by the Commission in 1975, have fallen far short of 
what is needed. 

F. RECOMMEXDATIOXS 

The Subcommittee recommends the following : 

(1) The Congress should establish an independent Office of Govern- 
ment Ethics, either Avithin the Civil Service Commission or as a 
separate office, to give new emphasis to the task of ensuring high 
ethical standards. 

(2) The new office should have clear authority to monitor agency 
enforcement of ethics and to order agencies to change their rules or 
enforcement practices in this area. 

(3) Pending the establishment of such an Office of Ethics, the Civil 
Service Commission should use its existmg authority' with dramatically 
increased vigor to ensure full and uniform compliance with both the 
letter and spirit of conflict-of-interest statutes and regulations. 



CHAPTER 7 

Proposals for Public Disclosure of Financial Interests 

A. president carter's legislative proposal 

President Carter proposed legislation in May 1977 '® that would 
require, among other things, broad financial disclosure for federal 
employees ranked at the GS-16 pay level or higher, covering some 
13,000 top-level officials. ^^ These officials would be required to disclose 
all sources and amounts of income, certain gifts valued in excess of 
$25, real and personal propert}^ holdings of $1,000 or more, and other 
financial interests. 

The Subcommittee has misgivings about reliance by the President 
on disclosure as the sole conflicts avoidance mechanism. First, the 
Subcommittee believes that disclosure, in and of itself, is an insufficient 
means of dealing with the problem of confficts of interest in regulatoiy 
agencies or in government generally. The law, we believe, must address 
itself to the conduct itself, not just its disclosure. Second, the Presi- 
dent's proposal would leave untouched many critically placed regula- 
tory officials below GS-16. We believe it necessary to include any 
officials at the GS-15 level and below who have important policy and 
decision roles, and each agency should be required to determine which 
officials below GS-16 should be covered by any disclosure rules 
enacted. **^ To keep this program to a manageable size, however, less 
information should be required from reporting officials at lowei ranks. 

B. disclosure mechanisms generally 

The problems with relying solely on public disclosure, without 
requirements clearly limiting or prohibiting certain interests, are 
several. 

First, disclosure mechanisms without standards fail to provide the 
kind of guidance to employees that they need and deserve. One of the 
basic recommendations of this Report is that the law, and the agencies 
implementing the law, must be clear in telling employees what is 
allowed and what is prohibited. Without such clarity, compliance by 
employees and enforcement by the agencies \vill remain weak. 

Second, the deterrent effect of disclosure — encouraging officials to 
shape their choices to avoid attack or embarrassment — is limited to 
high-level officials. Disclosure at the highest levels may well prove 



"« The Ethics in Government Act of 1977, introduced in the House on May 5, 1977, as H.R. 6952, and in 
the Senate on May 3, 1977, as S. 1446. 

so The legislation would also create an Office of Government Ethics in the Civil Service Commission 
headed by a Director appointed by the President and subject to Senate confirmation. The Director would, 
among other functions, audit at least 5 percent of the disclosure statements filed each year, and would be 
empowered to order "corrective action on the agencies and employees as he deemed necessary-." 

The Subcommittee agrees fully with the proposal to create an Office of Government Ethics and is in accord 
with the array of powers the President's proposal would grant to the Director of the office. The recommenda- 
tions of the Subcommittee (See Chapters 2 and 6 above) reflect this concurrence. 

«i This is, in effect, the requirement of Section 3P8 of the Clean Air Act Amendments of 1977 (Public Law 
0.5-95), which applies to officers and employees of EPA's air pollution programs. See Appendix VIII for the 
full text of § 308. 

(37) 



38 

relatively effective because public attention toward, and interest in, 
such persons is often high. However, as disclosure is applied at lower 
and lower levels, its efficacy diminishes because of limited press or 
other public interest. 

The particular public disclosure mechanism we analyzed in this 
report, involving Special GoveiTLment Employees at the FDA, works 
poorly for this reason. It is applied to part-time emplo^^ees at the 
FDA, not to the agency's top officials. Little public mterest in the 
file has been evidenced, and therefore, little deterrent value has been 
achieved.^- 

Third, standards are important because common sense and pre- 
vailing views do not readil}^ suggest a single standard or set of rules. 
Knotty conceptual problems make a universal standard difficult to 
establish, and a broad consensus is not easily achieved on such sub- 
jective questions as how large an interest has to be before the neutrality 
of its owner is affected. 

To rely on disclosure alone is to avoid the problems of constructing 
a set of clear standards. We do not intend to understate the com- 
plexities of this task. Our study has led us to conclude that standards 
are desirable and feasible, and the recommendations of this study are 
offered as a step in the right direction. 

Common Cause, in its study ''Serving Two Masters," ^^ recommends 
a system of full disclosure combined with automatic divestiture of all 
financial interests (unless exempted) in any company or organization 
affected by a proceeding in which an official participates. This a])- 
proach seeks to eliminate actual (as distinguished from apparent) 
conflicts that arise in the course of a regulator's duties. However, it 
would permit the holding of interests in a company until the time of 
the actual proceeding, and thus would permit ])otential conflicts to 
exist. In addition, it could result in requiring officials to divest at 
financially inopportune times, a result that will likely be resisted by 
applications for waivers and delays. Better, we believe, is an earlier 
trigger, one that operates to reciuire divestiture of interests in specified 
comjmnies between the time of appointment and the actual assumption 
of office. 

The Senate Committee on Governmental Aft'airs, in a thoughtful 
and comprehensive analysis of these and related problems ^^ also recom- 
mends a combination of disclosure and prohibitions. The prohibition 
would apply to ownership by an official of holdings in a company 
whose activities are in significant part subject to regulation by the 
employing agency. The recommendations, however, are limited to 
certain named regulatory agencies. ^^ We see no persuasive reasons for 
exempting any regulatory agencies, and we therefore recommend that 
all regulatory officials be made subject to the standards adopted. 



82 See Chapter 5 for further discussion of this problem. 

83 "SorviriR Two Masters. A Common Cause Study of Conflicts of Interest in the Executive Brandi, 
October 1976. See Draft Executive Order, pp. 63-74. 

»< "Study on Federal Kegulation: The Regulatory Appointments Process— Volunio 1," Committee on 
Government Operations, 95th Cong., 1st sess. (January 1977). See pp. 39-6;J. 
8Mbid. p. 61. 



39 



C. CONCLUSION 



The Subcoimnittcc strongly rccoiiinionds that (Icarly stated stand- 
ards of conduct, along Unes recommended in (chapter 2 of this report/" 
should accompany the imposition of any recpiirement for public 
disclosure of financial interests. 



8« With regard to standards of conduct, the Subcommittee is in substantial agreement, esfppi for difTer- 
ences noted in the text accompanying notes 83 and ST), with the standards proposed by Common Cause 

and by the Coniniitlec on Governmental Atlairs. 

The Common Cause study states that , in addition to disclosure, regulatory employees "should be required 
to divest automatically ail llnancial interests in any comapny or organization aflected by proceedings in 
which they participate," and that "divcsture be the presumed remedy in all cases wiierf an employee has 
a financial interest conflicting with his duties." ["Serving Two Masters", supra note 83 j). 7. J 

The Senate study, after citing reasons against outright prohibitions on certain financial interests, con- 
cluded, "However, we believe that reasonable prohibitions against ownership of certain property by officers 
and employees of regulatory bodies aie appropriate." [Senate Study, supra note 84, p. 60.J 



APPENDIX 



Part 

I. Title 18 United States Code, Section 208: "Acts affecting a personal 

financial interest" 43 

II. Executive Order 11222 Prescribing Standards for Ethical Conduct 

for Government Officers and Employees 44 

III. Civil Service Commission Regulations on Employee Responsi- 

bilities and Conduct 48 

IV. The Communications Act of 1 934, Section 4 (b) 58 

V. The Subcommittee's Conflict of Interest Case Studies: 

(a) Federal Communications Commission 59 

(b) Environmental Protection Agency 63 

(c) Food and Drug Administration — Special Government 

Employees 67 

VI. Conflict of Interest Program Documents, Food and Drug Admin- 
istration 72 

VII. Conflict of Interest Program Document, Federal Communications 

Commission. 83 

VIII. Clean Air Act Amendments of 1977, Section 308: Financial Dis- 
closure; Conflicts of Interest 84 



(41) 



APPENDIX I 

Title 18 United States Code, Section 208 

208. Acts affecting a personal financial interest. — (a) Except as permitted by 
subsection (b) hereof, whoever, being an officer or employee of the executive 
branch of the United States Government, of any independent agency of the United 
States, or of the District of Columbia, including a special Government employee, 
participates personally and substantially as a Government officer or employee, 
through decision, approval, disapproval, recommendation, the rendering of advice, 
investigation, or otherwise, in a judicial or other proceeding, application, request 
for a ruling or other determination, contract, claim, controversy, charge, accusa- 
tion, arrest, or other particular matter in which, to his knowledge, he, his spouse, 
minor child, partner, organization in which he is serving as officer, director, 
trustee, partner or employee, or any person or organization with whom he is 
negotiating or has any arrangement concerning prospective employment, has a 
financial interest — 

Shall be fined not more than $10,000, or imprisoned not more than two years, or 
both. 

(b) Subsection (a) hereof shall not apply (1) if the officer or employee first 
advises the Government official responsible for appointment to his position of the 
nature and circumstances of the judicial or other proceeding, apphcation, request 
for a ruling or other determination, contract, claim, controversy, charge, accusa- 
tion, arrest, or other particular matter and makes full disclosure of the financial 
interest and receives in advance a written determination made by such official 
that the interest is not so substantial as to be deemed likely to affect the integrity 
of the services which the Government may expect from such officer or employee, 
or (2) if, by general rule or regulation published in the Federal Register, the finan- 
cial interest has been exempted from the requirements of clause (1) hereof as being 
too remote or too inconsequential to affect the integrity of Government officers' or 
employees' services. (Oct. 23, 1962, P.L. 87-849, § 1(a), 76 Stat. 1124.) 

(43) 



APPENDIX II 

Executive Order 11222 — Prescribing Standards of Ethical Conduct for 
Government Officers and Employees 

By virtue of the authority vested in me by Section 301 of Title 3 of the United 
States Code, and as President of the United States, it is hereby ordered as follows: 

PART I POLICY 

Section 101. Where government is based on the consent of the governed, every 
citizen is entitled to have complete confidence in the integrity of his government. 
Each individual officer, employee, or adviser of government must help to earn and 
must honor that trust by his own integrity and conduct in all official actions. 

PART II — standards OF CONDUCT 

Section 201. (a) Except in accordance with regulations issued pursuant to 
subsection (b) of this section, no employee shall solicit or accept, directly or in- 
directly, any gift, gratuity, favor, entertainment, loan, or any other thing mone- 
tary value, from any person, corporation, or group which — 

(1) has, or is seeking to obtain, contractual or other business or financial re- 
lationships with his agency; 

(2) conducts operations or activities which are regulated by his agency; or 

(3) has interests which may be substantially affected by the performance or 
nonperformance of his official duty. 

(b) Agency heads are authorized to issue regulations, coordinated and approved 
by the Civil Service Commission, implementing the provisions of subsection (a) 
of this section and to provide for such exceptions therein as may be necessar}" and 
appropriate in view of the nature of their agency's work and the duties and respon- 
sibilities of their employees. For example, it may be appropriate to provide excep- 
tions (1) governing obvious family or personal relationships where the circum- 
stances make it clear that it is those relationships rather than the business of the 
persons concerned which are the motivating factors — the clearest illustration 
being the parents, children or spouses of federal employees; (2) permitting accept- 
ance of food and refreshments available in the ordinary course of a luncheon or 
dinner or other meeting or on inspection tours where an employee may properl}'" 
be in attendance; or (3) permitting acceptance of loans from banks or other finan- 
cial institutions on customary terms to finance proper and usual activities of 
employees, such as home mortgage loans. This section shall be effective upon 
issuance of such regulations. 

(c) It is the intent of this section that employees avoid any action, whether or 
not specifically prohibited by subsection (a), which might result in, or create the 
appearance of — 

(1) using public office for private gain; 

(2) giving preferential treatment to any organization or person; 

(3) impeding government efficiency or economy; 

(4) losing complete independence or impartiality of action; 

(5) making a government decision outside official channels; or 

(6) affecting adversely the confidence of the public in the integrity of the 
Government. 

Sec 202. An employee shall not engage in any outside employment, including 
teaching, lecturing, or writing, which might result in a conflict, or an apparent 
conflict, between the private interests of the employee and his official government 
duties and responsibilities, although such teaching, lecturing, and writing by 
employees are generally to be encouraged so long as the laws, the provisions of this 
order, and (>ivil Service Commission and agency regulations covering conflict of 
interest and outside employment are observed. 

Sec 203. Employees may not (a) have direct or indirect financial interests that 
conflict substantially, or appear to conflict substantially, with their responsi- 

(44) 



45 

bilitio-^ and duties as ForloiMl oniployr os, or (h) on^uKr. \n, dir^ctlv or iiHlircr-tlv 
financial transfictions as a rc-ult of, or primarily rclvinp; upon, information ob- 
tamod through thoir omploymcnt. Asido fi-om thfso restrictions, omployfos aro 
froc to engage in lawful financial transactions to the same extent as private citizf ns 
Agencies may, however, further restrict such transactions in the light of the 
special circumstances of their indivichial missions. 

Sec. 204. An employee shall not use Ferleral property of any kinrl for oth^r than 
oflficially approved activities. He mu-t protect anrl conserve all Federal property 
inchiding cciuipment and supplies, entrusted or issued to him. ' ^ ' 

Sec. 205. An employee shall not directly or indirectly make use of, or permit 
others to make use of, for the purpose of furthering a' private interest official 
information not made availal)le to the general public. ' 

Sec. 206. An employee is expected to meet all just financial obligations, es- 
pecially those — such as Federal, State, or local taxes — which are imposed by 'law. 

PART III STANDARDS OF ETHICAL CONDUCT FOR SPECIAL GOVERNMENT EMPLOYEES 

Section 301. This part applies to all "special Government employees" as 
fU>fined in Section 202 of Title 18 of the United States Code, who aro employed 
in the Executive Branch. 

Sec. 302. A consultant, adviser or other special Government employee must 
refrain from any use of his public ofhce which is motivaterl bv, or gives the ap- 
pearance of being motivated by, the desire for private gain for himself or other 
persons, including particularly those with whom he has family, business, or 
financial ties. 

SEr. 303. A consultant, adviser, or other special Government employee shall 
not use any inside information obtained as a result of his government service for 
private personal gain, either by direct action on his part or by counsel, recom- 
mendations or suggestions to others, including particulai'ly those with whom he 
whom he has.family, business, or financial ties. 

Sec. 304. An adviser, consultant, or other special Government employee shall 
not use his position in any way to coerce, or give the appearance of coercing, 
another person to provide any financial benefit to him or persons with whom he 
has family, business, or financial ties. 

Sec. 305. An. adviser, consultant, or other special Government employee shall 
not receive or soficit from persons having business with his agency anything of 
value as a gift, gratuity, loan or favor for himself or persons with'whom he has 
family, business, or financial ties w^hile employed by the government or in con- 
nection with his work with the government. 

Sec. 306. F>ach agency shall, at the time of employment of a consultant, adviser, 
or other special Government employee require him to supply- it with a statement 
of all other employment. The statement shall list the names of all the corporations, 
companies, firms. State or local governmental organizations, research organiza- 
tions and educational or other institutions in which he is serving as employee, 
officer, member, owner, director, trustee, adviser, or consultant. In addition, it 
shall list such other financial information as the appointing department or agency 
shall decide is relevant in the light of the duties the appointee is to perform. The 
appointee may, but need not, be required to reveal precise amounts of investments. 
The statement shall be kept current throughout the period during which the 
employee is on the Government rolls. 

PART IV REPORTING OF FINANCIAL INTERESTS 

Section 401. (a) Not later than ninety days after the date of this order, the 
head of each agency, each Presidential appointee in the Executive Office of the 
President who is not subordinate to the head of an agency in that Office, and each 
full-time member of a committee, board, or commission appointed by the Presi- 
dent, shall submit to the Chairman of the Civil Service Commission a statement 
containing the following: 

(1) A list of the names of all corporations, companies, firms, or other business 
enterprises, partnerships, nonprofit organizations, and educational or other 
institutions — 

(A) witli which he is connected as an employee, officer, owner, director, trustee, 
partner, adviser, or consultant; or 

(B) in which he has any continuing financial interests, through a pension or 
retirement plan, shared income, or otherwise, as a result of any current or prior 
employment or business or professional association; or 



46 

(C) in which he has any financial interest through the ownei>;hip of stocks, 
bonds, or other securities. 

(2) A list of the names of his creditors, other than those to whom he may be 
indebted by reason of a mortgage on property which he occupies as a personal 
residence or to whom he may be indebted for current and ordinary household and 
living expenses. 

(3) A list of his interests in real property or rights in lands, other than propprty 
which he occupies as a personal residence. 

(b) Each person who enters upon duty after the date of this order in an office 
or position as to which a statement is required by this section shall submit such 
statement not later than thirty days after the date of his entrance on duty. 

(c) Each statement required by this section shall be kept up to date by sub- 
mission c^f amended statements of any changes in, oi additions to, the information 
required to be included in the original statement, on a quarterly basis. 

Sec. 402. The Civil Service Commission shall prescribe regulations, not incon- 
sistent with this part, to require the submission of statements of financial interests 
by such em])loyees, subordinate to the heads of agencies, as the Commission 
may designate. The Commission shall prescribe the form and content of such 
statements and the time or times and places for such submission. 

Sec. 403. (a). The interest of a spouse, minor child, or other member of his 
immediate household shall be considered to be an interest of a person required 
to submit a statement by or pursuant to this part. 

(b) In the event any information required to be included in a statement re- 
quired by or pursuant to this part is not known to the person required to submit 
such statement but is known to other persons, the person concerned shall request 
such other persons to submit the required information on his behalf. 

(c) This part shall not be construed to require the submission of any information 
relating to any person's connection with, or interest in, any professional society 
or any charitable, religious, social, fraternal, educational, recreational, public 
service, civic, or political organization or any similar organization not conducted 
as a business enterprise and which is not engaged in the owneiship or conduct 
of a business entei-prise. 

Sec. 404. The Chairman of the Civil Service Commission shall report to the 
President any information contained in statements required by Section 401 of 
this part which may indicate a conflict between the financial interests of the 
official concerned and the performance of his services for the Government. The 
Commission shall report, oi by regulation require reporting, to the head of the 
agency concerned any information contained in statements submitted pursuant 
to regulations issued under Section 402 of this part which may indicate a conflict 
between the financial interests of the officer or employee concerned and the per- 
formance of his services for the Government. 

Sec. 405. The statements and amended statements required by or pursuant 
to this pait shall be held in confidence, and no information as to the contents 
thereof shall be disclosed except as the Chairman of the Civil Service Commission 
or the head of the agenc}-- concerned may determine for good cause shown. 

Sec. 400. Th(? statements and amended statements required by or pursuant to 
this part shall be in addition to, and not in substitution for, or in derogation of, 
any similar requirement imposed by law, regulation, or order. The submission of a 
statement or amended statements required by or pursuant to this part shall not be 
deemed to permit any person to participate in any matter in which his participation 
is prohibited ))y law, regulation, or order. 

PART V DELEGATING AUTHORITY OF THE PRESIDENT UNDER SECTIONS 20r) AND 20S 

OF TITLE 18 OF THE UNITED STATES CODE RELATING TO CONFLICTS OF INTEREST 

Section 501. As used in this part, "department" means an executive depart- 
ment, "agency" means an independent agency or establishment or a Govern- 
ment corporation, and "head of an agency" means, in the case of an agency 
headed by more than t)ne person, the chairman or comparal)le member of such 
agency. 

Se('. 502. There is dclegat^'d, in accordance with and to the extent prescribed 
in Sections 503 and 504 of this part, the authority of the President under Sections 
'iiOFt and 208(i)) of Title IS, United States Code, to permit certain actions by an 
ofliccr or employee of th(> Goveiriment, including a special (Jovernment employee 
for appointment to whose position the President is responsible. 

Sec. 503. Insofar as the authority of the President referred to in Section 502 
extends to any appointee of the President subordinaU; to or subject to the chair- 



47 

manship of the hojvl of a dcpartiiK^nt or agency, it is dclcgatcH to .such d pai tin'-nt 
or agencj'' head. 

Sec. 504. Insofar as the authority of tho President referred to in Section 502 
extends to an appointee of the President who is within or attached to a department 
or agency for i)iirposcs of administration, it is delegated to the head of such (i<'part- 
ment or agency. 

Skc. 505. Notwithstanding any provision of the preceding sections of this part 
to the contrary, this part does not inchide a delegation of the authority of the Presi- 
dent referred to in Section 502 insofar as it extends to : 

(a) The head of any department or agency in the Executive B, ancli ; 

(1)) Presideniial appointees in the Executive Office of the President who are not 
subordinate to tht> head of an agency in that Oflice; and 

(c) Presidential appointees to committees, boards, commissions, or similar 
groups established l^y the President. 

PART VI PROVIDING FOR THE PERFORMANCE BY THE CIVIL SERVICE COMMISSION 

OF CERTAIN AT'THORITY VESTED IN THE PRESIDENT BY SECTION IT.W OF THE 
REVISED STATUTES 

Section 601. The Civil Service Commission is designated and emi)owe?-ed to 
perform, without the approval, ratification, or other action of the President, so 
much of the authority vested in the President by section 175.3 of the Revised 
Statutes of the United States (5 U.S.C. 631) as relates to establishing regulations 
for the conduct of persons in the civil service. 

Sec. 602. Regulations issued under the authority of Section 601 shall be con- 
sistent with the standards of ethical conduct provided elsewhere in this order. 

PART VII GENERAL PROVISIONS 

Section 701. The Civil Service Commission is authorized and directed, in 
addition to responsibilities assigned elsewhere in this order: 

(a) To issue appropriate regulations and instructions implementing Parts II, 
III, and IV of this order; 

(b) To review agency regulations from time to time for conformance with this 
order; and 

(c) To recom.mend to the President from time to time such revisions in this 
order as may appear necessary to ensure the maintenance of high ethical standards 
within the Executive Branch. 

Sec. 702. Each agency head is hereby directed to supplement the standards 
provided by law, by this order, and by regulations of the Civil Service Commission 
with regulations of special applicability to the particular functions and activities 
of his agency. Each agenc}^ head is also directed to assure (1) the widest possible 
distribution of regulations issued pursuant to this section, and (2) the availability 
of counseling for those employees w^ho request advice or interpretation. 

Sec. 703. The following are hereby revoked: 

(a) Executive Order No. 10939 of May 5, 1961. 

(b) Executive Order No. 11125 of October 29, 1903. 

(c) Section 2(a) of Executive Order No. 10530 of May 10, 1954. 

(d) White House memorandum of July 20, 1961, on "Standards of Conduct 
for Civilian Employees." 

(e) The President's Memorandum of May 2, 1963, "Preventing Conflicts of 
Interest on the Part of Special Government Employees." The efTective date of 
this revocation shall be the date of issuance b}^ the Civil Service Commission of 
regulations under Section 701(a) of this order. 

Sec. 704. All actions heretofore taken by the President or by his delegates in 
respect of the matters affected by this order and in force at the time of the issuance 
of this order, including any regulations prescribed or approved by the President 
or by his delegates in respect of such matters, shall, except as they may be 
inconsistent with the provisions of this order or terminate by operation of law, 
remain in effect until amended, modified, or revoked pursuant to the authoritj^ 
conferred by this order. 

Sec. 705. As used in this order, and except as otherwise specifically provided 
herein, the term "agency" means any executive department, or any independent 
agency or any Government corporation; and the term "employee" means any 
officer or employee of an agency. 

Lyndon B. Johnson, 
May 8, 1U65. 



APPENDIX III 

Civil Service Commission Regulations 

(5 C.F.R. Part 735) 

Part 73,5 — Employee Responsibilities and Conduct 

Note: Part 1001 added to this chapter, 81 F.R. 873, Januai-y 22, 1966 and revised 32 F.R. 11113, Aug. 1, 
1*j67 supplements this Part 73.3. 

SUBPART A — general PROVISIONS 
Sec. 

735.101 Purpose. 

735.102 Definitions. 

735.103 ApplicabiUty to members of the uniformed services. 

735.104 Issuance, approval, and pubUcalion of agency regulations. 

735.105 Interpretation and advisory service. 

735.106 Reviewing statements and reporting conflicts of interest. 

735.107 Disciplinary and other remedial action. 

SUBPART B AGENCY REGULATIONS GOVERNING ETHICAL AND OTHER CONDUCT 

AND RESPONSIBILITIES OF EMPLOYEES 

735.201 Specific provision of agency regulations. 
735.201a Proscribed actions. 

735.202 Gifts, enteitainment, and favors. 

735.203 Outside employment and other activity. 

735.204 Financial interests. 

735.205 Use of Government property. 

735.206 Misue of information. 

735.207 Indebtedness. 

735.208 Gambling, betting, and lotteries. 

735.209 General conduct prejudicial to the Government. 

735.210 Miscellaneous statutory provisions. 

SUBPART C AGENCY REGULATIONS GOVERNING ETHICAL AND OTHER CONDUCT 

AND RESPONSIBILITIES OF SPECIAL GOVERNMENT EMPLOYEES 

73."j.301 Specific provisions of agency regulations. 

735.302 Use of Government employment. 

735.303 Use of inside information. 

735.304 Coercion. 

735.305 Gifts, entertainment, and favors. 

735.306 Miscellaneous statutory provisions. 

SUBPART D AGENCY REGULATIONS GOVERNING STATEMENTS OF EMPLOYMENT AND 

FINANCIAL INTERESTS 

73.'). 401 Form and content of statements. 

735.402 Specific provisions of agency regulations for employees. 

735.403 Employees required to submit statements. 
7.35.403a Employee's complaint on filing recjuiremont. 

735.404 Employees not required to submit statements. 
735.404a Interests not recjuired to be reported. 

735.405 Time and place for submission of employees' statements. 
735. 40<) Supplementary statements. 

735.107 Interests of employees' relatives. 

735.408 Information not known by employees. 

73.5.409 Infonnation not required. 

735.410 Confidentiality of employees' statements. 

735.411 ElTec t of employees' statements on other requirements. 

73,j.412 Specific provisions of agency regulations for special Govenunent employees. 

Authority; The provisions of this J'art 735 issued under sees. 002, 701, 702, E.O. 11222; 3 CFR I!!».4-l'.l'i5, 
Comp., p. 300. 

Source: The provisions of this Part 73.-. appear at 33 F.R. 12487, Sept. 4, 19C.8, unless otherwise rioted. 

SuBPAitT A — General Provisions 
§735.101 Purpose. 

The maintenanoe of unusually high .standard.s of honesty, integrity, impartiality, 
and conduct by Government employees and special Government employees is 
essential to assure the proper performance of the Government business and the 

(48) 



49 

maintenance of confidence l)y citizens in their (lovciniiM-nt. The avoidiuu-c of 
misconduct and conflicts of interest on the pint of (;()V('rninont einployccs and 
special Government emjiloyces through infoniicd judfrnicnt is indisjx'nsahle to 
the maintenance of these standards. To accord with these concepts, this j>art sets 
forth the Commission's regulations under which each agency h('ad shall issue 
regulations covering the agency's employees and special (lovernnient em)j!oyees, 
prescribing standards of conduct and responsibilities, and governing statement's 
reporting employment and financial interests. 

§735.102 Definitions. 

In this part: 

(a) "Agency" means an Executive agency (other than the General Accounting 
Office) as defined by section 105 of title 5, United States Code, the Postal Service, 
and the Postal Rate Commission. 

(b) "Employee" means an employee of an agency, but does not includ(.' a 
special Government employee or a member of the'uniformed services. 

(c) '^'Executive order" means Executive Order 11222 of May 8, 1965. 

(d) "Person" means an individual, a cori)oration, a company, an association, 
a firm, a partnership, a society, a joint stock company, oi- imy other organization 
or institution. 

(e) "Special Government employee" means a "special Government employee" 
as defined in section 202 of title 18, United States Code, who is employed in the 
executive branch, but does not include a member of the uniformed services, 

(f) "Uniformed services" has the meaning given that term by section 2101 of 
title 5, United States Code. 

[33 F.R. 12487, Sept. 4, 1968, as amended at 36 F.R. 11999, June 24, 1971] 
§ 735.103 Applicability to members of the uniformed services. 

This part, except this section, is not applicable to members of the uniformed 
services. Each agency ha\ing jurisdiction over members of the uniformed services 
shall issue regulations covering those members and legulating their ethical and 
other conduct and the reporting of employment and financial interests in a manner 
consistent with the Executive order and this part. 

§735.104 Issuance, approval, and publication of agency regulations. 

(a) Except as provided in paragraph (f) of this section, each agency head 
shall prepare, and submit to the Commission for approval, regulations in accord- 
ance with this part that : 

(1) Implement the requirements of law, the Executive order, and this part; and 

(2) Prescribe additional standards of ethical and other conduct and reporting 
requirements that are appropriate to the particular functions and activities of the 
agency and are not inconsistent with law, the Executive order, and this part. 

(b) After Commission approval each agency head shall: 

(1) Submit the agency's regulations to the Federal Register for publication; 

(2) Furnish each employee and special Government employee a copy of the 
appropriate agency regulations (or a comprehensive summary thereof) within 
90 days after approval ; 

(3) Furnish each new emploj^ee and special Government employee a copy of 
the appropriate agency regulations (or a comprehensive summary thereof) at the 
time of his entrance on duty; 

(4) Bring the appropriate agency regulations to the attention of each employee 
and special Government employee annually, and at such other times as circum- 
stances warrant; 

(5) Assure the availability of counseling to each emploj-ee and special Gov- 
ernment employee as provided in §735.105; and 

(6) Have available for review by employees and special Government employ- 
ees, as appropriate, copies of laws, the Executive order, agency regulations, and 
pertinent Commission regulations and instructions relating to ethical and other 
conduct. 

(c) Agency regulations issued under this part are effective only after approval 
by the Commission and publication in the Federal Register. 

(d) Requests for approval of agency regulations to be issued under this part 
shall be directed to the United States Civil Service Commission, Office of the 
General Counsel, Washington, D.C. 20415. 

(e) This section applies to any amendment of agency regulations issued under 
this part. 

(f) An agency head who does not consider it feasible to prepare agency regu- 
lations under this part because of the small number of his employees, or for an- 



50 

other reason acceptable to the commission, may adopt the regulations in this 
part for application, as appropriate, to the employees and special Government 
emploj-ees of his agency if: 

(1) He obtains the approval of the Commission for that adoption; and 

(2) After obtaining that approval, he submits a notice to the Federal Register 
announcing the applicability of this part to his employees. 

§ 735.105 Interpretation and advisory service. 

(a) Each agenc}^ head shall designate a top-ranking employee of his agency 
who has appropriate experience, preferably legal, and in whom he has complete 
personal confidence, to be the counselor for the agency and to serve as the agency's 
designee to the Commission on matters covered by this part. The counselor shall 
be made responsible for coordination of the agencj^'s counseling services provided 
under paragraph (b) of this section and for assuring that counseling and inter- 
pretations on questions of conflicts of interest and other matters covered by this 
part are available to deputy counselors designated under paragraph (b) of this 
section. 

(b) Each agency head shall designate deputy counselors for the agency's em- 
ployees and special Government employees. Deputy counselors designated under 
this section shall be qualified and in a position to give authoritative advice and 
guidance to each employee and special Government employee who seeks advice 
and guidance on questions of conflicts of interest and on other matters covered 
by this part. 

(c) Each agency shall notify its employees and special Government employees 
of the availability of counseling services and of how and where these services are 
available. This notification shall be made within 90 days after approval of the 
agency regulations to be issued under this part, and periodically thereafter. In 
the case of a new employee or special Government employee appointed after this 
notification, notification shall be made at the time of his entrance on duty. 

§ 735.106 Reviewing statements and reporting conflicts of interest. 

(a) Agency regulations issued under this part shall establish a system for the 
review of statements of employment and financial interests submitted under Sub- 
part D of this part. The system of review shall be designed to disclose conflicts 
of interest or apparent conflicts of interest on the part of employees and special 
Government employees. 

(b) The system of review established under paragraph (a) of this section shall 
provide that, when a statement submitted under Subpart D of this part or infor- 
mation from other sources indicates a conflict between the interests of an employee 
or special Government employee and the performance of his services for the 
Government and when the conflict or appearance of conflict is not resolved at a 
lower level in the agency, the information concerning the conflict or appearance 
of conflict shall be reported to the agency head through the counselor for the 
agency. 

(c) The employee or special Government employee concerned shall be provided 
an opportunity to explain the conflict or appearance of conflict. 

§ 735.107 Disciplinary and other remedial action. 

(a) Agency regulations issued under this part shall provide that a violation of 
the agency regulations b}^ an employee or special Government employee may be 
cause for appropriate disciplinary action which may be in addition to any penalty 
prescribed by law. 

(b) When, after consideration of the explanation of the employee or special 
Government employee provided by § 735. lOG, the agency head decides that 
remedial action is required, he shall take immediate action to end the conflicts or 
appearance of conflicts of interest. Remedial action maj' include, but is not 
limited to: 

(1) Changes in assigned duties; 

(2) Divestment by the employee or special Government employee of his 
conflicting interest; 

(3) Disci[)linary action; or 

(4) Disqualification for a particular assignment. 

Remedial action, whether disciplinary or otherwise, shall be effected in accordance 
with any applicable laws, Executive orders, and regulations. 



51 

SUBPART B AGENCY REGULATIONS GOVKRNINO ETHICAL ASl) OTHl.R CONDUCT 

AND RESPONSiniLITIKS OI' EMPLOYEES 

§ 735.201 Specific provisions of agency regulations. 

Agency regulations issued under this su})part, as a minimum, shall contain 
provisions covering the standards of and governing the cUiical arul oth<'j condnft 
of its employees set forth in §§ 735.202 through 735.210. 

§ 735.201a Proscribed actions. 

An employee shall avoid any action, whether or not specifically prohibited jjy 
this subpart, which might result in, or create the api)oarance of: 
(r<) Using public office for private gain; 

(b) Giving preferential treatment to any person; 

(c) Impeding Government efficiency or economy; 

(d) Losing complete independence or impartiality; 

(e) Making a Government decision outside official channels; or 

(f) Affecting adversely the confidence of the public in the integritv of the 
Government. 

§ 735.202 Gifts, entertainment, and favors. 

(a) Except as provided in paragrai)hs (1)) and (f) of this section, an employee 
shall not solicit or accept, directly or indirectly, any gift, gratuity, favor, enter- 
tainment, loan, or any other thing of monetary value, from a person who: 

(1) Has, or is seeking to obtain, contractual or other business or financial 
relations with his agency; 

(2) Conducts operations or activities that are regulated bj' his agency; or 

(3) Has interests that may be substantially affected by the performance or 
nonperformance of his official duty. 

(b) Agency regulations implementing paragi-aph (a) of this section may provide 
for such exceptions as maj' be necessai-y and appropriate in view of the nature of 
the agency's work and the duties and responsibilities of the employees. Appro- 
priate exceptions which may be made by an agency include, but are not limiterl 
to, those that: 

(1) Govern obvious famih' or personal relationships (such as those between the 
parents, children, or spouse of the employee and the employee) when the cir- 
cumstances make it clear that it is those relationships rather than the business of 
the persons concerned which are the motivating factors; 

(2) Permit acceptance of food and refreshments of nominal value on infrequent 
occasions in the ordinary course of a luncheon or dinner meeting or other meeting 
or on an inspection tour where an employee may proi)erly be in attendance; 

(3) Permit acceptance of loans from banks or other financial institutions on 
customary terms of finance proper and usual activities of employees, such as 
home mortgage loans; and 

(4) Permit acceptance of unsolicited advertising or promotional material, such 
as pens, pencils, note pads, calendars and other items of nominal intrinsic value. 

(c) [Reserved] 

(d) An employee shall not solicit a contribution from another employee for a 
gift to an official superior, make a donation as a gift to an official superior, or 
accept a gift from an emploj^ee receiving less pay than himself (5 U.S.C. 7351). 
However, this paragraph does not prohibit a voluntaiy gift on nominal value or 
donation in a nominal amount made on a special occasion such as marriage, 
illness, or retirement. 

(e) An emplo3'ee shall not accept a gift, present, decoration, or other thing from 
a foreign government unless authorized by Congress as provided by the Constitu- 
tion and in section 7342 of title 5, United States Code. 

(f) Neither this section nor § 735.203 precludes an employee from receipt of bona 
fide reimbursement, unless prohibited by law, for expenses of travel and such other 
necessary subsistence as is compatible with this part for which no Government 
pajmient or reimbursement is made. However, this paragraph does not allow an 
employee to be reimbursed, or payment to be made on his behalf, for excessive 
personal living expenses, gifts, entertainment, or other personal benefits, nor does 
it allow an employee to be reimbursed by a person for travel on official business 
under agenc}^ orders when reimbursement is proscribed by Decision B-1 28527 of 
the Com.ptroller General dated March 7, 1967 (46 Comp. Gen 689). 



52 

§ 735^03 Outside employment and other activity. 

(a) An employee shall not engage in outside employment or other outside activ- 
ity not compatible with the full and proper discharge of the duties and responsi- 
bilities of his Government employment. Incompatible activities include but are 
not limited to: 

(1) Acceptance of a fee, compensation, gift, payment of expense, or am* other 
thing of monetary value in circumstances in which acceptance may result in, or 
cieate the appearance of, conflicts of interest; or 

(2) Outside employment which tends to impair his mental or physical capacity 
to perform his Government duties and responsibilities in an acceptable manner. 

(b) An employee shall not receive any salary or anything of monetary value 
from a piivate source as compensation for his services to the Government (18 
U.S.C. 209). 

(c) Employees are encouraged to engage in teaching, lecturing, and writing 
that is not prohibited by law, the Executive order, this part, or the agency reg- 
ulations. However, an employee shall not, either for or without compensation, 
engage in teaching, lecturing, or writing, including teaching, lecturing, or writing 
for the purpose of the special preparation of a person or class of persons for an 
examination of the Commission or Board of Examiners for the Foreign Service, 
that depends on information obtained as a result of his Government employment, 
except when that information has been made available to the general public or 
will l)e made available on request, or when the agency head gives written author- 
ization for use of nonpulilic information on the basis that the use is in the public 
interest. In addition, an emplo3'ee who is a Presidential appointee covered by 
section 401 (a) of the order shall not receive compensation or anything of monetary 
value for any consultation, lecture, discussion, writing, or appearance the subject 
matter of which is devoted substantially to the responsibilities, programs, or 
operations of his agenc}', or which draws substantiall}- on official data or ideas 
which have not become part of the body of public information. 

(d) [Reserved] 

(e) This section does not preclude an emplovee from: 

(1) [Reservedl 

(2) Participation in the activities of national or State political parties not 
])roscril)ed by law. 

(3) Participation in the affairs of or acceptance of an award for a meritorious 
pulilic contribution or achievement given by a charitable, religious, professional, 
social, fraternal, nonprofit educational and recreational, public service, or civic 
organization. 

(4) Outside employment permitted under the regulations of his agency issued 
under this part. 

§ 735.204 Financial interests. 

(a) An employee shall not: 

(1) Have a direct or indirect financial interest that conflicts substantially, or 
a])pears to conflict substantially, with his Government duties and responsibilities; 
or 

(2) Engage in, directly or indirectly, a financial transaction as a result of, or 
l^iimarily relying on, information obtained through his Government employment. 

(1)) This section does not preclude an employee from having a financial interest 
ov engaging in financial transactions to the same extent as a private citizen not 
employed by the Government so long as it is not prohibited by law, the Executive 
(•rdcr, this section, or the agency regulations. 

§ 735.205 Use of Government property. 

An employee shall not directly or indirectly use, or allow the use of. Government 
]:)roperty of any kind, including property leased to the Government, for other 
than officially approved activities. An employee has a positive duty to protect 
and conserve Government property, including equipment, supplies, and other 
proj)erty entrusted or issued to him. 

§ 735.206 Misuse of information. 

For the purpose of furthering a private interest, an employee shall not, except 
as provided in § 735.20:Kc), directly or indirectly use, or allow the use of, official 
information obtained through or in connection with his Government employment 
which has not been made available to the general public. 



53 

§ 735.207 Indebtedness. 

An employee shall pay each just financial oi)li^ati()n in a proper and timely 
nianner, especially one imposed by law stich as KederHJ, State or local taxes. For 
the purpose of this section, a "just financial obliRation" means one acknowledged 
by the employee or n^duced to judgment by a court or one imposed by law such 
as I'cderal, State or local taxes, and "in a proper and timelv manner'' means in 
a manner which the agency determines does not, under the circumstances, reflect 
adversely on the Government as his employer. In the event of dispute between 
an employee and an alleged creditor, this section does not require an agency to 
determjne the validity or amount of the disputed debt. 
[40 FR 7435, Feb. 20, 197.",] 

§735.208 Gambling, betting, and lotteries. 

An employee shall not pnrticii)ate while on CJovernment-ownfd or leased prop- 
erty or while on duty for the (lovernment, in any gambling activity including the 
operation of a gambling device, in conducting a lottery or pool,"^in a game for 
money or property, or in selling or purchasing a numbers slip or ticket. However, 
this section does not preclude activities: 

(a) Necessitated by an employee's law enforcement duties; or 

(b) Under section 3 of Executive Order 10027 and similar agencv-approved 
activities. 

§ 735.209 General conduct prejudicial to the Government. 

An employee shall not engage in criminal, infamous, dishonest, immoral, or 
notoriously disgraceful conduct, or other conduct prejudicial to the Government. 

§735.210 Miscellaneous statutory provisions. 

Each employee shall acquaint himself with each statute that relates to his 
ethical and other conduct as an employee of his agency and of the Government. An 
agency shall direct the attention of its employees, by specific reference in the agency 
regulations issued under this part, to each statute relating to the ethical and otheV 
conduct of employees of that agencv and to the following statutory provisions: 

(a) House Concurrent Resolution 175, 85th Congress, 2d session, 72 A Stat. B12, 
the "Code of Ethics for Government Service". 

(b) Chapter 11 of title IS, United States Code, relating to bribery, graft, and 
conflicts of interest, as appropriate to the employees concerned. 

(c) The prohibition against lobbying with appropriated funds (IS U.S.C. 1913). 

(d) The prohibitions against disloyalty and striking (5 U.S.C. 7311, 18 U.S.C. 
1918). 

(e) The prohibition against the employment of a member of a Communist or- 
ganization (50 U.S.C. 784). 

(f) The prohibitions against (1) the disclosure of classified information (18 
U.S.C. 798, 50 U.S.C. 783); and (2) the disclosure of confidential information (18 
U.S.C. 1905). 

(g) The provision relating to the hal)itual use of intoxicants to excess (5 U.S.C. 
7352). 

(h) The prohibition against the misuse of a Government vehicle (31 U.S.C. 
G38a(c)). 

(i) The prohibition against the misuse of the franking privilege (18 U.S.C. 1719). 

(j) The prohibition against the use of deceit in an examination or personnel 
action in connection with Government Employment (18 U.S.. 1917). 

(k) The prohibition against fraud or false statements in a Government matter 
(IS U.S.C. 1001). 

(I) The prohibition against mutilating or destroying a public record (18 U.S.C. 
2071). 

(m) The prohibition against counterfeitine and forging transportation requests 
(IS U.S.C. 508). 

(n) The prohibitions against (1) embezzlement of Government money or 
property (18 U.S.C. 641); (2) faiUng to account for public money (18 U.S.C. 
643); and (3) embezzlement of the money or property of another person in the 
possession of an employee by reason of his employment (18 U.S.C. 654). 

(o) The prohibition against unauthorized use of documents relating to claims 
from or by the Government (18 U.S.C. 285). 

(p) The prohibitions against political activities in subchapter III of chapter 
73 of title 5, United States Code and 18 U.S.C. 602, 603, 607, and 608. 



54 

(q) The prohibition against an emplo5^ee acting as the agent of a foreign 
principal registered under the Foreign Agents Registration Act (18 U.S.C. 219). 

SUBPART C AGENCY REGULATIONS GOVERNING ETHICAL AND OTHER CONDUCT 

AND RESPONSIBILITIES OF SPECIAL GOVERNMENT EMPLOYEES 

§ 735.301 Specific provisions of agency regulations. 

Agency regulations issued under this subpart, as a minimum, shall contain 
provisions covering the standards of and governing the ethical and other conduct 
of its special Government employees as set forth in §§ 735.302 through 735.306. 
In addition, to the extent considered appropriate by the agency head, the agency 
regulations issued under this subpart shall require its special Government em- 
ployees to adhere to the standards of conduct made applicable to employees Ijy 
the agency regulations issued under Subpart B of this part. 

§ 735.302 Use of Government employment. 

A special Government employee shall not use his Government employment for 
a purpose that is, or gives the appearance of being, motivated by the desire for 
private gain for himself or another person, particularly one with whom he has 
family, business, or financial ties. 

§735.303 Use of inside information. 

(a) A special Government employee shall not use inside information obtained 
as a result of his Government employment for private gain for himself cr another 
person either by direct action on his part or by counsel, recommendation, or 
suggestion to another person, particularly one with whom he has family, business, 
or financial ties. For the purpose of this section, "inside information" means 
information obtained under Government authority which has not become part of 
the body of public information. 

(b) Agency regulations implementing paragraph (a) of this section may provide 
that special Government employees may teach, lecture, or write in a manner not 
inconsistent with § 735.203(c) in regard to employees. 

§ 735.304 Coercion. 

A special Government employee shall not use his Government emploj^ment to 
coerce, or give the appearance of coercing, a person to provide financial benefit to 
himself or another person, particularly one with whom he has family, business, 
or financial ties. 

§735.305 Gifts, entertainment, and favors. 

(a) Except as provided in paragraph (b) of this section, a special Government 
emploj'ee, while so employed or in connection with his employment, shall not 
receive or solicit from a person having business with his agenc}^ anything of value 
as a gift, gratuity, loan, entertainment, or favor for himself or another person, 
particulaily one with whom he has family, business, or financial ties. 

(b) Agency regulations implementing paragraph (a) of this section may provide 
for exceptions for special Government emploj^ees that are not inconsistent with 
the exceptions authorized for their employees under § 735.202(b). 

§ 735.306 Miscellaneous statutory provisions. 

Each special Government employee shall acquaint himself with each statute 
that relates to his ethical and other conduct as a special Government employee 
of his agency and of the Government. An agency shall direct the attention of its 
special Government employees, by specific reference in the agency regulations 
issued under this part, to each statute relating to the ethical and other conduct of 
special Government emi)loyees of that agency and to those statutory provisions 
listed in § 735.210 that are applicable to special Government employees. 

SUBPART D AGENCY REGULATIONS GOVERNING STATEMENTS OF EMPLOYME.NT AND 

FINANCIAL INTERESTS 

§ 735.401 Form and content of statements. 

The statements of employment and financial interests required under this 
subpart for use by employees and special Government emjjloyees shall contain, as 
a niiiiiinum, the information required by the formats prescribed by the Commission 
in the Fc^deral Personnel Manual. An agency shall not include questions on a 
statement of employment and financial iiit(u-ests that go beyond, or are m gi-eater 
detail than, those included on the Commission's formats without the appioval ot 
the Coniuiission. 



55 

§735.402 Specific provisions of agency repulations for cniployeeM. 

Agency rogulations issucrl under this subpart for cniploycr-s, us a niininunn, 
shall contain pi'ovisions covering th(! reporting recpiircnients set f(»rth in §§ 7.'i5.'10:i 
through 735.411. 

§ 735.403 Employees required to submit statements. 

Except as provided in § 735.404, each agency head shall recpiiro statements of 
emploA'ment and financial interests from: 

(a) Employees paid at a level of the Executive; Schedule in subchapter II of 
chapter 53 of title 5, United States Code. 

(h) Employees classifi(;d at GS-13 or ai)Ove under sectitni 5332 of title 5, United 
States Code, or at a comparable pay h^vel under another authority, who are in 
positions identified in the agency's regulations as positions the inciun bents of 
which are responsible for making a Government decision or taking a Government 
action in regard to: 

(1) Contracting or procurement; 

(2) Administering or monitoring grants or subsidies; 

(3) Regulating or auditing private or other non-Federal enterprise; or 

(4) Other activities where the decision or action has an economic impact on the 
interests of any non-Federal enterprise. 

(c) Employees classified at GS-13 or above under section 5332 of title 5, United 
States Code, or at a comparable pay level under another authority, who are in posi- 
tions which the agency has determined have duties and responsibilities which 
require the incumbent to report employment and financial interests in order to 
avoid involvement in a possible confiicts-of-interest situation and carry out the 
purpose of law, Executive order, this part, and the agency's regulations. 

(d) Employees classified l)elow GS-13 under section 5332 of title 5, United 
States Code, or at a comparable paj'- level under another authority, who are in 
positions which otherwise meet the criteria in paragraph (b) or (c) of this section, 
when the inclusion of the positions in the agency's regulations has been specifically 
justified by the agency in writing to the Commission as an exception that is essen- 
tial to protect the integrity of the Government and avoid employee involvement 
in a possible confiicts-of-interest situation. 

§ 735.403a Employee's complaint on filing requirement. 

Agency regulations issued under this subpart shall inform employees of the 
opportunity for review through the agency's grievance procedure of a complaint 
by an employee that his position has been improperly included under the regula- 
tions of his agency as one requiring the submission of a statement of employment 
and financial interests. 

§735.404 Employees not required to submit statements. 

(a) Employees in positions that meet the criteria in paragi'aph (b) of § 735.403 
may be excluded from the reporting requirement when the agency determines that: 

(1) The duties of a position are such that the likelihood of the incimibent's 
involvement in a conflicts-of -interest situation is remote; 

(2) The duties of a position are at such a level of responsibility that the sub- 
mission of a statement of employment and financial interests is not necessary be- 
cause of the degree of supervision and review over the incumbent or the incon- 
sequential efiect on the integrity of the Government; or 

(3) The use of an existing or alternative procedure approved by the Commission 
is adequate to prevent possible conflicts of interest. 

(b) A statement of employment and financial interests is not required by this 
subpart from an agency head, a Presidential appointee in the Executive Office 
of the President who is not subordinate to the head of an agency in that office, 
or a full-time member of a committee, board, or commission appointed by the 
President. These employees are subject to separate reporting requirements under 
section 401 of the Executive order. 

§ 735.404a Interests not required to be reported. 

Agency regulations issued under this subpart may exclude the reporting of 
any interest which has, by general rule or regulation published in the Federal 
Register under section 208(b)(2) of title 18, United States Code, been exempted 
as too remote or too inconsequential to affect the integrity of employees' services. 



56 

§ 735.405 Time and place for submission of employees' statements. 

An employee required to submit a statement of employment and financial 
interests under the regulations of his agency shall submit that statement to the 
office designated in the agency regulations not later than: 

(a) Ninety days after the effective date of the agencj' regulations issued under 
this part if employed on or before that effective date; or 

(b) Thirty days after his entrance on duty, but not earlier than ninety days 
after the effective date, if appointed after that effective date. 

§ 735.406 Supplementary statements. 

Changes in, or additions to, the information contained in an employee's state- 
ment of emplo5^ment and financial interests shall be reported in a supplementary 
statement as of June 30 each year, except when the Commission authorizes a 
different date on a showing by an agency of necessity therefor. If no changes or 
additions occur, a negative report is required. Notwithstanding the filing of the 
annual report required by this section, each employee shall at all times avoid 
acquiring a financial interest that could result, or taking an action that would 
result, in a violation of the conflicts-of-interest provisions of section 208 of title 
18, United States Code, or Subpait B of this part. 

§ 735.407 Interests of employees' relatives. 

The interest of a spouse, minor child, or other member of an employee's im- 
mediate household is considered to be an interest of the emplo3-ee. For the purpose 
of this section, "member of an employee's immediate household" means those 
blood relations who are residents of the employee's household. 

§ 735.408 Information not known by employees. 

If any information required to be included on a statement of employment 
and financial interests or supplementar\^ statement, including holdings placed in 
trust, is not known to the employee but is known to another person, the employee 
shall request that other person to submit information in his behalf. 

§ 735.409 Information not required. 

This subpart does not require an employee to submit on a statement of employ- 
ment and financial interests or supplementary statement any information relating 
to the employee's connection with, or interest in, a professional societ}'- or a 
charitable, religious, social, fraternal, recreational, public service, civic, or political 
organization or a similar organization not conducted as a business enterprise. 
For the purpose of this section, educational and other institutions doing research 
and development or related work involving grants of money from or contracts 
with the Government are deemed "business enterprises" and are required to be 
included in an employee's statement of employment and financial interests. 

[33 FR 12487, Sept. 4, 1968, as amended at 40 FR 48339, Oct. 15, 1975] 

§ 735.410 Confidentiality of employees* statements. 

An agency shall hold each statement of employment and financial interests, 
and each supplementary statement, in confidence. To insure this confiden- 
tiality, an agency shall designate which employees are authorized to review and 
retain the statements. Employees so designated are responsible for maintaining 
the statements in confidence and shall not allow access to, or allow information 
to be disclosed from, a statement except to carry out the purpose of this part. 
An agency may not disclose information from a statement except as the Commis- 
sion or the agency head may determine for good cause shown. 

§ 735.411 Effect of employees' statements on other requirements. 

The statements of employment and financial interests and supplementary 
statements required of employees are in addition to, and not in substitution 
for, 01- in derogation of, any similar requirement imposed b}^ law, order, or regula- 
tion. The submission of a statement or supplementary statement by an employee 
does not permit him or any other person to participate in a matter in which his or 
the other person's participation is prohibited by law, order, or regulation. 

§ 735.412 Specific provisions of agency regulations for special Government 
employees. 

(a) Agency regulations issued under this subpart for special (jovernment em- 
ployees, as a minimum, shall contain provisions covering the reporting require- 
ments set forth in this section. 



57 

(b) Except as providocl in |)aragraph (c) of this sect ion, cmcIi uKcncy hca<l slmll 
require each special Govcrnincnt cMiploycc to suhinit a st;itcmciil of fuiplos iikuL 
and financial interests which reports: 

(1) All other employment; and 

(2) The financial interests of the; sjjccial (lovcrnmcnt employee whicli th«- 
agency determiners are relevant in the light of th(; (hities he is to perform. 

(c) An agency head may waive the requirenu^nt in jjaragiajjh (h) of this s«'Ction 
for the submission of a statement of employment and financial interests in the 
case of a special Government emplo3^e(; who is not a consultant or an <'xpert 
when the agency finds that the duties of the position held by that special (Jov- 
ernment employee are of a nature and at such a level of res|)onsil>ility that the 
submission of the statement by the incumbent is not necessary to protect t he- 
integrity of the Government. For the purpose of this paragrai)h, "consultant" 
and "expert" have the meanings given those terms by Chapter 304 of the Federal 
Personnel Manual, l)ut do not include : 

(1) A physician, dentist, or allied medical specialist whose services are prociiied 
to provide care and service to patients; or 

(2) A veterinarian whose services are procured to proxide care and sersice to 
animals. 

(3) A specialist appointed for intermittent confidential intelligence consultation 
of iDrief duration. 

(d) A statement of employment and financial interest required to be submitted 
under this section shall be submitted not later than the time of employment of 
the special Government employee as provided in the agency regulations. I'^ach 
special Government employee shall keep his statement current throughout his 
employment with the agency by the submission of supplementary statements. 

[33 F.R. 12487, Sept. 4, 1%8, as amended at 34 F.R. 0515, Apr. Ki, 19()9) 



APPENDIX IV 

Section 4(b) of the Federal Communications Act of 1934 

(b) Each member of the Commission shall be a citizen of the United States. 
No member of the Commission or person in its employ shall be financially inter- 
ested in the manufactm-e or sale of radio apparatus or of apparatus for wire or 
radio communication; in comm.unication by wire or radio or in radio transmission 
of energy ; in any company furnishing services or such apparatus to any company 
engaged in communication by wire or radio or to any company manufacturing 
or selling apparatus used for communication by wire or radio; or in any company 
O'^Tiing stocks, bonds, or other securities of any such company; nor be in the 
employ of or hold any official relation to any person subject to any of the pro- 
visions of this Act, nor own stocks, bonds, or other securities of any corporation 
subject to any of the provisions of this Act. Such commissioners shall not engage 
in any other business, vocation, profession, or employment; but this shall not 
apply to the presentation or delivery of publications or papers for which a reason- 
able honorarium or compensation may be accepted. Any such commissioner 
serving as such after one year from the date of enactment of the Communications 
Act Amendments, 1952 [July 16, 1952], shall not for a period of one year following 
the termination of his services as a commissioner represent any person before the 
Commission a professional capacity, except that this restriction shall not apply 
to any commissioner who has served the full term for which he was appointed. 
Not more than four members of the Commission shall be members of the same 
political party. 

(58) 



APPENDIX V(a) 
Case Studies — Federal Communications Commission 
fcc case study a 

On August 20, 1974, Kmployoc A, who was Acting Chief of the T;irifT lUviow 
Branch of the Common Canirr Bureau (and is now Chief), discU)sed that he 
had various stocks interests, some jointly with his spouse and some owned by 
her alone. The employee is responsible "for the review and analvsis of jjroposcd 
tariffs (rates) and proposed revisions to tariffs to determine overall adequacy 
and lawfulness . . ." among other duties. 

Among the stocks listed were joint ownership of 300 shares of Republic Corf). 
and his wife's ownership of 225 shares of Siemens Corp. On November 2<), 1974, 
the Acting Executive Director wrote to the (leneral Counsel requesting his opinion 
on several stocks, including Republic and Siemens. 

The General Counsel responded on December 27, 1974, by ruling that Em- 
ployee A would have to divest of Republic and would either have to obtain a 
waiver for his wife's ownership of Siemens or to file a certificate of nonparticipation. 
The General Counsel indicated that such a waiver would be gi-anted bv saying 
that "such a determination would be proper because ]\Irs. (A's) holdings are 
insubstantial." 

On March 17, 1975, Employee A reported to the Executive Director that he 
had transferred his interest in Republic to his wife and requested a waiver for 
both stocks. On May 1, 1975, the Executive Director granted that waiver request 
after the Director of the Bureau had voiced no objection. Employee A's financial 
disclosure form filed on Julv 22, 1975, listed the stocks in his wife's name as did 
his form filed on July 19, 1976. 

In his description of the two companies submitted to the General Counsel in 
1974, the Director said the following: 

Republic Corporation 

"Company and subsidiaries are mainly engaged in the field of visual com- 
munications arts, which include various printing operations, motion picutre 
film processing, videotape program and duplication, sound recording and proc- 
essing for motion pictures, and television, productions, and certain marketing 
and promotional services; . . ." Also steel products, post office handling systems, 
aircraft parts. 

"Film and Videotape Proce'jsing and Sound Production Group — processes 
motion picture film including 35 mm and 10 mm black and white and color 
film; . . . and produces and distributes videotape programs, duplicates videotape 
material and makes tape-to-film and film-to-tape transfers. Wholly owned Glen 
Glenn Sound Co. records and processes sound for motion picture and videotape 
productions . . . 

"Electronics Assembly Group assembles for other companies electronic com- 
ponents and systems, including semiconductor devices, printed circuit boards, 
cables, and harnesses." 

Siemen A.G. 

"Company and its subsidiaries constitute the largest electrical company 
in West Germany. Products are divided into the following groups: power 
engineering . . .; telecommunication cables; electrical installations . . .; data 
systems, including data processing, teleprinters . . .; medical engineering . . .; 
and components, piincipally tubes and semiconductor devices . . . Foreign sales 
(outside West Germany) contributed 43 percent of the total [sales] . . . 

"In fiscal 1974, Co. planned to discontinue making television and radio tubes 
as thev were considered outmoded by semiconductor devices." 

Neither the General Counsel nor 'the Executive Director attempted to ascer- 
tain at that time the market value of the shares held nor to relate that value 
to any test of substantialitv. The current value of 300 shares of Republic Corp. 
is approximately $2,400. The current value of 225 shares of Siemens Corp. is 

(59) 



60 

approxirnatfjly $25,000. Thus, the total value of the stocks is between $27,000 
and $28,000. In the recent review of the waiver under the new "10/25" formula, 
conducted during the Subcommittee's investigation, it was determined by the 
Executive Director that the spouse's holdings did not exceed the guidelines. 

FCC CASE STUDY B 

Employee B originally joined the FCC's Office of the Chief Engineer as an 
expert on an excepted appointment not to exceed 130 days. He is now a per- 
manent employee of that Office as a Program Analyst (GS-14). His duties involve 
allocation of spectrum space for comm)inications and include development of 
"overall spectrum allocation plan for all U.S. non-government radio sei vices, 
balancing such interrelated factors as spectrum efficiency, radio equipment cost, 
quality of service, administrative cost and complexity, potential interference 
between services, future flexibility, and international treaty obligations." 

Before beginning his employment, he disclosed that he was the owner of 152 
shares of General Klectric. On April 10, 1975, before Elmployee B began work, 
the Acting Executive Director wrote to the General Counsel to request his opin- 
ion on the stock. The General Counsel determined that the stock would have 
to be divested. 

Subsequently, the Employee transferred the stock interest to his wife's name 
on May 14, 1075, and requested a waiver. On May 19, 1975, the Executive 
Director informed the General Counsel of the request for the waiver. The General 
Counsel did not comment on that request until November 10, 1975. In concurring 
with the waiver request, the General Counsel noted that: 

"This office is currently reviewing our financial confficts-of-interest policy. 
We are presently considering establishing a policy of not concurring on the grant 
of a waiver if the value of a financial interest in a regulated corporation held Ijy an 
employee's spouse exceeds one fourth of the employee's annual salary. If Mr. [B] 
were paid an annual salary based on his per day fee, it appears that the value of 
the interest held by his wife would not exeed one fourth of his annual salary. 
Therefore, it would be within the limit this office currently has under consideration. 
Furthermore, it is our opinir^n that Mr. [B's] status, as a temporary consultant is 
of significance. lie is engaged in a study of specific dimensions which would appear 
to have limited impact on the primary area of Commission regulation touching 
General Electric. "In light of the foregoing, the relatively small number of shares 
and their value, I concur in the grant of the waiver. However, since our decision is 
leased in part on Mr. [B's] status, in my opinion the decision to grant Mr. [B's] 
waiver must be reexamined either if Mr. [B] is employed as a consultant for an 
extended period or if he becomes a Commission employee on a permanent basis." 

On November 25, 1975, the Executive Director issued the waiver, but also 
noted that the waiver was "subject to reexamination of Mr. B if employed as a 
special Government employee (or an extended period or if he becomes a Com- 
mission employee on a permanent basis." Ern|>loyec B did become a regular 
employee on February 9, 1970, but the Commission's records disclose no re- 
examination of his waiver. Ills 1970 financial disclosure form listed "no change." 
The (General Counsel noted that the approximate value of the stock in November 
1975 was $0,704. The approximate current market of the stock is $7,500. On 
May 10, 1977, during the Sub(;ommittee's investigation, the Executive Director 
notified the Cif:neral Counsel that the employee's spouse' holdings exceeded the 
naw "10/25" ff^rmula. 

FCC casp: study c 

Employee (I is a Supervisory Electronics Engineer of the Domestic Facilities 
Transmisrion Branch of the Facilities Division of the Conimc^n Carrier Bureau. 
On June 4, 1974, he wrote to the Executive Director requesting a waiver for an 
interest in 78 shares of A'i'&T. He noted that: 

"The regi.'-tration of scvt iity-( jght shar(;s of AT&T stock ownrrl by my step- 
father but which forme-ily indude'd my nanie on the rr^gistration for right of 
survival have bcfn transferr(;d to tin; ownership of my ste[>father with my wife as 
a party with right of survival. The stock was accumulated over a number of years 
by my parents. My name had formerly appeared on th(; stock rcgistn-Ltion on ad- 
vice of iitiovncy. I have never contributed funds or advice regarding the purchase 
of the stock by my parents. Neither have I shared in stock dividends nor received 
any remuneration. While the stock registration includes my wife's n;irne, neither 
fthe nor I will ;^hare in stock dividends nor r(!ceive any reinuneration. Stock divi- 
dends will be rec(!ivf;d only by n)y ht''pfuth(!r for his retirement income and the 



Gl 

•certificates will be disposed of, shoidd they still exist, upon the death of luy step- 
father." 

On June 8, 1971, the KxcM'Utive Durector Krantfd the wuivcr. 

That waiver reniaincHl in elfet't until 1974. On November 27, 1974, he advised 
the I'iXeeutive Director that: 

"On November 7, 1974, my stvi)fath(r passed away; thus, mv wife is ab(»ut to 
become sole owner of the 7<S shares of ATctT stock. \Vhil(» I had earlier stated that 
the stock would be disposed of should my wife come into sol(» ownership, I could 
not envision the condition of a depr<\sse(i stock market such as exists today." 

Both th(^ (ilen(M:d Counsel und the liuicau Director concurr(fl that tliew.-iiver 
should be (^xtend(>(l and the 10x(U'utiv(! Director e\tend<'d it on December 10, 1974. 
It is not clear whether or not the "depressed stock market" was the n-ason for the 
extension. There was no nu nMon of that factor nor was then^ any mention of a 
later recvaluation. 

Mr. C. rei)orted "no change" on his disclosure forms in 197r» and 197(5. On May 
10, 1977, during this Subconunittee's investigation, tlie lOxccutive Director notilii'd 
the General (/ounsel that the sj^ouse's holdings exceed(^d the new fornuila. The 
approximate current market value of the shares is $4, SOU. 

The employee* in (juc'stion revi(»ws facility ai)plications by common carriers, in- 
cluding AT&T. Th(^ Chief of the Bureau, in aj)proving Mr. C's original request 
for a waiver in 1974, noted that "Mr. (C;)'s work duties as a Supervisory Elec- 
tronics Engineer includes review of facility applications tiled at AT&T and associ- 
ated Bell System companies. ..." 

FCC CASE STUDY D 

Employee D is the Chief of one of the two Field Oflices of the Common Carrier 
Bureau, lie was selected as Acting Chi(>f of the Field Ollice on July 1, 1974. That 
Field Office "is responsible for conducting field studies and investigations of the 
principal U.S. telecommunication carriers providing interstate and foreign tele- 
phone service, anei their afliliateel numufacturing, service, supply and management 
corporations." 

Employee D filed his financial disclosure form on August 19, 1974, and listed 
the following seven stocks which are connnunicat ions-related: 

EE&G. — (Manufacturer of connnunications equipment through its subsidi- 
aries Reynolds Electrical & Engineering Co. and Applied Systems Technology, 
Inc.). 

Litton Industries, Inc. — (Manufacturer of communications equipment). 

Ampex Corporation. — (Company provides services and a])paratus to companies 
<3ngaged in communications). 

Victor Graphics Syste77is, Inc. — (Company provides services and ai)paratus to 
companies engageel in communications). 

Lockheed Aircraft Corporation. — (Manufacturer of communications equipment). 

General Instrument Corporation. — (Company and its subsidiaries manufacture 
communications equipment) . 

Signal Companies, Inc. — (Owner of stock in Golden West Broadcasters, licensee 
and owner of one television and four radio stations). 

After consultation with the General Counsel, the Executive Director ruled on 
November 5, 1974 that Mr. D would have to divest himself of the stocks. On 
November 12, 1974, Employee D notified his stock broker to transfer the stocks 
to his wife's name and requested a waiver for his wife's holdings. The Common 
Carrier Bureau reconunenrled approval, and the Executive Director approved the 
waiver on November 26, 1974. 

While the Executive Director was aware of the number of shares of each stock 
held, there was no attempt to ascertain their total dollar value nor to relate that 
dollar value to nny test of "su})stantiality." The General Counsc^l's menu) of 
November 1, 1974 to the Executive Director noted that "although Mr. [H] has 
an extensive list of stocks the amounts hekl can be deemed as inconsequential on 
an overall basis." However, there was no explicit calculation in that memo of the 
total amount held. As of July 18, 1976, when Mr. D filed his latest disclosure 
form, his wife still owned three of the seven stocks — EG&G, General Instrument 
Corp. and Victor Giaphic Systems. The approximate current value of those 
stocks is as follows: 

E.G. & G.— 200 shares $3, 000 

General Instrument — 112 shares 2, 240 

Victor Graphic Systems — oOO shares 300 

Total $6,440 



During the Subcommittee's investigation, on April 20, 1977, the employee 
notified the Executive Director that his spouse had sold her stock in Victor 
Graphics Co. Accordingly, in the Executive Director rereview under the new 
"10/25" formula, the emploA'ee was found in compliance. 

FCC CASE STUDY E 

Employee E ha^ been an electronics engineer in a Field Office in a major city 
since September 25, 1966, and was Assistant Engineer in charge for several 
years. He was named Engineer in Charge of the Field Office on ]March 13, 1977. 
The Field Offic* "is responsible for all important engineering activities of the- 
Field Operations Bureau . . ." including investigations. The Field Office could be 
involved in either interference reports relating to the Domestic Public Land 
Mobile Radio Services or certain wire activities which involve AT&T or Belt 
companies. 

Prior to Mr. E's employment at the FCC, his wife had inherited 205 shares of 
AT&T stock and had placed it in both her name and her husband's name. 
Emplovee E disclosed this ownership to the Com.mission on April 7, 1967. 

On April 24, 1967, Chairman Hyde of the FCC notified :Mr. E that he would 
have to divest of the AT&T stock anrl gave him 30 days to do so. On June 1„ 
1967, Mr. E notified the Executive Director that he had divested. He did not^ 
however, notify the Executive Director that he had transferred the stock to 
to his wife's name. On his 1973 financial disclosure form, he listed "no change" 
although the FCC had no earlier forms on record and it was therefore not clear 
that his wife owned the AT&T stock. 

On Apiil 15, 1974, an employee of the Executive Director's Office who was 
reviewing Emplovee E's form telephoned him to clarifv the "no change" 
notation. His 1974 disclosure form filed on August 22, 1974 listed the AT&T 
stock in his wife's name. 

On ]\Iay 14, 1975, Mr. E requested a waiver for his wife's AT&T stock. The 
Executive Director notified the General Counsel of the situation on May 19, 
1975. The General Counsel's Office considered the matter for over four months 
and notified the Executive Director on September 24, 1975 that because of the 
"relatively high value of his financial interest, I do not believe it can be deemed 
insubstantial. I, therefore, do not concir in the grant rf a waiver." At the time 
of the General d unsel's ruling, the value of the stock was approximately $9,430. 

The Executive Director replied to the General Counsel on October 1, 1975. 
At this time, the General Counsel's Office was considering the "10-25" formula 
mentioned above. The Executive Director commented that: 

"As your office has proposed to bring Vjefore the Commission the present 
waiver procedure, GAO's informal comments thereon, a recommended formula 
to be applied (using Government salary and value of communications stock 
held by a member of the employee's immediate family), I am going to withhold 
action under delegated authority on the . . . requested until the Commission 
will have an opportunity to review t e matter. 

". . . The adoption of a straight percentage figure, say 15 percent, to establish 
the "substantial" nature of the interest, would imply that the wife of senior 
policy-making official (GS-17 or GS-18) could own a much larger dollar amount 
(up to 15 percent of her husband's salary) in shares of a regulated corporation 
than, say, the wife of a field office supervisor, GS-11, whose exposure to, or 
influence, over the self-same corporation is so completely different as to be 
negligiljle." 

Because the General Counsel's formula was not presented to the Commission, 
the Executive Director made no determination on the waiver req:est, Mr. E's 
19/'" form listed "no change." A memorandum in the file from an employee of 
the Executive Director's Office dated February 3, 1977, noted that: 

"We have not required this divestiture pending Commission review of this; 
formula, l)oth because of the inheritance aspect, and the remoteness of any 
action involving the Assistant Engineer In Charge, ... in AT&T matters." 

The stock in question is currently worth approximately $12,700. In the recent 
review under the new "10/25 formula," the Executive Director notified the 
General Counsel that the spouse's holdings exceeded the guideline. On May 19, 
1977, four days before the Subcommittee's hearing, the Executive Director notified 
the Chif>f of the Fiekl Operations Bureau that Employee l""s waiver would be 
reconsidered under the new formula. 



APPENDIX V(b) 
Case Studies — Environmental Photkction Agency 

EPA case study a 

Employee A wa-^ an Assistant Administrator of EPA for x-vcral V( ar< witfi 
^extensive responsibilities in air i)olhition and solid waste regulatory ureas. During 
his employment, he reported the following stock interests: 

(1) Diamond *S'/?awror/:— Manufactures 300 specialty chemical^, including 
sewage treatment chemicals; 

(2) Central Telephone and Utility Co. — Purchases natural gas and generates 
electricity; ^ 

(3) Continental Oil — Large petroleum company; 

(4) Goodyear Corp. — Manufactures tires, organic chemicals, auto accessories 
and airplane parts ; 

(.')) Southern Xatnral Resources — Natural gas production and pipeline, through 
a subsifliary owns a paper mill and forest area ; 

((]) Union Pacijlc Corp. — Oil, gas, coal, and othtn- minerals. 

The Subconmiittee staff interviewed Emplovee A, who explained that he 
inherited the stock following his father's death in 1970. 

The portfolio is of moderate size, exceeding S')0,000, spread across a dozen 
securities. One large holding, Union Pacific, exceeded Slo.OOO in market value. 
Employee A indicated he was aware of conflicts questions that had arisen with 
fornier EPA Administrator Russell Train * and wanted to avoid any problems 
in his own case. He therefore sought guidance from the Agenc\' Counselor, also 
EPA's Deputy General Counsel. Employee A recalls the Agency Counselor being 
"fairly emphatic" in his response that Employee A need not consider selUng any 
of the stock, and that there is no requirement that EPA employees not own 
particular stock. The Agency Counselor advised that full disclosure'would satisfy 
EPA's requirement and that Employee A need only fill out the usual form. This 
Employee A did. The agency counselor then approved the holding routinely. EPA 
records contain no indication that the agency counselor sought information on the 
dollar value of the holdings (reporting of these amounts was not required until 
1977) or on the activities of companies such as Southern Natural Resources whose 
areas of business are not common knowledge. Employee A confirmed he was not 
asked to supply dollar values. 

Employee A said he was "surprised" he wasn't asked to do more to avoid 
the appearance of conflict. Several of the companies are engaged in activities 
affected by air and waste programs under this employee. Employee A himself 
cited Goodyear's tires as a source of particulate pollution in the air. He said 
he had become aware more recently that Union Paciflc, a large holding in the 
portfolio, is heavily involved in coal and other minerals. This employee was 
ultimately in charge of EPA's monitoring of the coal conversion program 
while he held this stock [he said, however, that he had "pushed against" the 
interests of the coal companies in his work]. Diamond Shamrock, a holding 
company for such chemical producers as Diamond Alkali, is attected by EPA 
regulations. All six companies are aflectcd substantially by various EPA 
decisions. 

Employee A stated that he took no actions aflfecting any of these companies 
individually, and would not have, had the situation arose. Most of his deci- 
sions affected entire industries. One exception he acknowledged is action he 
took involving individual auto companies, but the employee held no auto company 
stock and said he would not have acquired any while at his EPA post. 



1 Mr. Train had placed both his and his wife's assets in a blind trust in 1973. Contrary to instructions 
from Train, the bank trustee sent advice notices of stock transactions for the tnist. A Washington, DC. 
magazine found evidence of the trust ownership of an oil company stock in the Trains' trash, and pubhshed 
a report. Mr. Train instructed the bank to sell the stock, and reminded the bank to refrain from sending 
advice slips. 

(63) 



64 

Employee A left EPA in early 1977 and is currently in private practice. While- 
no current EPA action is called for, this case study presents a teUing instance 
of an employee apparently willing to take steps to avoid the appearance of 
conflict if asked to do so, who met with a "don't even bother" response from 
the agency's Deputy General Counsel, the agency's top official on matters of 
ethics. 

EPA CASE STUDY B * 

Employee B is the head of a Quality Assurance Laboratory in the Office of 
Pesticide Programs. In June, 1975, the Employee reported ownership of the 
following stocks: 

May 1977 

Approximate value 

Exxon Corp. — 100 shares $5, 000 

Gulf Oil Corp.— 100 shares 2, 800 

Texaco Corp. — 100 shares 2, 600 

Upjohn Corp. — 50 shares 1, 500 

Total 11, 900 

The shares of the three oil companies clearly represent a conflict since all 
three manufacture pesticides. Nevertheless, the Deputy Assistant Administrator 
for Pesticides (who is the "deputy-counelor" for the division) determined that 
there was no conflict because the employee was "not in a position to influence" 
decisions. In effect the deputy counselor granted a waiver from 18 U.S.C. 208 
without, however, making the required determination that the interest was 
"not so substantial as to affect the integrity of his services . . ." The employee 
reported exactly the same stock interests in the disclosure form on June 30, 1976. 

The Deputy Assistant Administrator's determination that the head of the 
QuaUty Assurance Laboratory is not in a position to influence decisions is surely 
open to the question. EPA's job description for this position states that: 

"The incumbent directs a program which is an integral part within OPP for 
assessment, definition, and solution of problems relating to the determination 
of active ingredicmts, related compounds, impurities, breakdown products, and 
contaminants in technical grade pesticides and formulation. These activities are 
critical to the U.S. program of regulation and registration of pesticides." 

* * * it: * * * 

"(A function of the laboratory) is to conduct special studies using the developed 
or other acceptable methodology to determine what chemicals in formulations 
may present acute and/or long-term human and environmental hazards. The 
data accumulated from these studies are used by the Office of Pesticide Programs 
to determine the appropriate actions necessary to protect the public and the 
environment. Additionally the incumbent serves on various OPP panels and 
committees whereby he reviews chemical data and makes recommendations which 
are used in OPP decisions affecting pesticide formulations and devices. 

* m * * m m ^ 

"(The incumbent) serves on various OPP panels to review chemical data fo^ 
registration and OSPR and submit recommenchitions which are used by OPP 
in evaluating problems concerning human health and the environment." 

It seems clear, therefore, that the head of this laboratory does in fact have 
a significant input into pesticide decisions. Moreover, EPA's own regulations 
fist as an illustration of these matters which may fall within the statutory pro- 
hibition— "Registration of pesticido products." 40'CFR § .S.302(c) (b) In addition, 
the prohibition of 18 U.S.C. 208 applies l)roadly to "participating personally 
and substantially ... in any judicial proceedings, application, request for ruling 
or other determination, contract, claim, controversy, charge, accusation, arrest 
or other particular matter . . ." involving a company in which the employee 
has a financial interest. The statute does not differentiate between those who 
have direct or indirect decision-making authority. Rather the statute rofers 
broadly to "participation" and would clearly cover participation by the head 
of such a laboratory described here. 



* Emplnypfi B's full job tiflp is: TToarl of the Analytical rhomisfry Soction. Cliomiral and Biological 
InvestiRations Uraiicli, Technical Services Division, Ollicc of I'esticides Programs, El'A. 



65 



EPA CASE STUDY C 



Employee C is a Product Manager in the RcKistration Division of the Pesti- 
cides Program. As sueh, the employee is reHf)onsil)le for a team which reviews 
pesticides products. The Profhict Manager's duties, among others, are descrihcd 
as follows in the job description: 

"Provides over all technical and administrative? direction of particularly com- 
plex, highly controversial, and frecpiently precedent-.setting jMivaU; industry: 
(1) petitions for permissible tolerances of fx'sticide residue on raw agricultural 
products, processed foods, and food adtiitives, and (2) applications for registration 
of pesticide products and their uses." 



* 



"Resolves intricate coordinate problems. Decisions made have widespreacJ, 
national and international impact on the pesticide industry and product users. 

"Conducts preliminary administrative and scientific analyses taking into 
account results of lower-level procedural review. Based on jiroduct expertise, 
determines scientific and administrative deficiencies . . . Based on product 
expertise, suggests alternate procedures industry may wish to use. Determines 
routing and sets priorities for cases for in-depth scientific evaluation and study 
by several branches, by own Team, or by a combination of these. Throughout 
in-depth processing stays in contact with the evaluators and coorrlinates their 
work, answers their questions, obtains additional information from petitioners 
and registrants, and makes fine-line judgments and decisions concerning manner 
of proceeding, holding, or discontinuing reviews." 

"Works to resolve conflicting points of view among scientists with respon- 
sibility for achieving a very high degree of satisfactory results. Develops, writes, 
and signs correspondence giving notice of approval or denial of cases with full 
responsibility for actions taken." 

On the 1976 disclosure form, the employee listed ownership of the following 
stocks: 

May 1977 

Approximate talue 

Occidental Petroleum — 307 shares $S, 400 

Shell Oil Co.— 40 shares 2, 700 

Total 11, lOO 

Both of these companies make a substantial number of pesticide products. 
Accordingly, the employee, on June 30, 1976 requested a waiver of 18 U.S.C. 
208 from the Deputy General Counsel. Apparently, however, the waiver request 
was never received by the Deputy General Counsel. Because there is no follow- 
up system for such requests, neither the Deputy General Counsel nor the Deputy 
Assistant Administrator for Pesticides nor the employee were aware that the 
waiver request had not been received. It was only when the Subcommittee stafT 
inquired about the status of the waiver in April of 1977 that the request was 
finally transmitted to the Deputy General Counsel for his consideration. (No deci- 
sion has been made on the waiver request.) 

EPA CASE STUDY D 

EPA Case Study D is an environmental engineer for radiation in the Energy 
Systems Analysis Branch, Technology Assessment Division, Office of Radiation 
Programs. 

Employee D owns 100 shares of American Electric Power, in the name of 
his son. AEP operates nuclear reactors through at least one of its subsidiaries 
and is otherwise heavily engaged in electric power generation. Employee D also 
owns 100-share lots of other energy related companies, including Gulf Oil and 
Columbia Natural Gas. 

The branch for which Employee D works reviews the environmental impacts 
of electrical energy generating systems, particularly nuclear power reactors, and 
evaluates their risks. The engineer calculates potential radiation doses to the 
population around proposed nuclear facilities, complies conclusions and recom- 
mendations based on these calculations, prepares Congressional testimony and 
conducts reactor siting studies. 



66 

When questioned about these holdings by his deput}' counselor in 1976, the 
engineer wrote he was "not influenced by my holding limited amounts of stock 
in energy-related companies." The deputy counselor noted "ok" on the letter, 
adding only: "but inform me of any change that might involve a potential conflict 
of interest." 

"While it is not clear that Employee D's daily tasks directly involve Ameri- 
can Electric Power itself, there is possible conflict between the nuclear activities 
of AEP and Employee D's review of the environmental hazards produced by 
such activities. 

Moreover, the procedure followed by the deputy counselor in this case, while 
more thorough than the efl'orts of other deputy counselors at EPA review^ed by 
the Subcommittee staff, was dcflcient, because it left the determination of the 
existence of a conflict of primarily in the hands of the employee. Emplyee D 
offered his own declaration that he was not influenced by his stock ownership 
However, EPA's agency counselor had previously stated in a memorandum to all 
deputy counselors : 

"If an individual may be working on projects affecting the company [in which 
he owns stock] it is essential that the employee disqulaify himself or herself from 
that particluar project or obtain a waiver from the Agency Counselor that the 
interest is not so substantial as to constitute a conflict. The employee cannot indi- 
vidually make the decision that their ownership is de minimis and not a conflict of 
interest." (Emphasis added.) 

This procedure does not appear to have been followed in this case. 

EPA CASE STUDY E 

EPA Case Study E also works in EPA's radiation program, in the Division 
which sets EPA's' standards limiting radioactivity in the environs of nuclear 
power plants. This employee is a project leader for developing radiation standards 
including protective action guides for accidental releases of radioactive material 
to the environment. 

Employee E owns 400 shares of VEPCO stock with a current value of roughly 
$6,000. In a letter on file at EPA, the employee explained his ownership of the 
stock in VEPCO a company which operates nuclear power plants near Washington, 
D.C., by stating "my official duties are not likely to have an impact on the 
operations of this company in any significant manner." The deputy counselor 
again noted his acceptance of this holding "with the caution that if the situation 
should change, any potential conflict should l)e brought to my attention." 

The deputy counselor acknowledged in an interview that if any of his divisions 
should be subject to prohibitions on holdings, it would first be the Standards 
and Criteria Division for which this project leader works. However, he nonetheless 
permitted ownership of a block of stock in a company subject to the regulation 
of the division. And again, the procedure used does not comply with EPA's own 
internal guidelines. 



ArPEXDIX V(c) 

Case Studies — Food and Drug Administhatios 
fda case study a 

Case Stud}' A involves a member of the Panel on Review of Cardiova-scular 
Devices.! Panel member A is the Director of the Biomedical P^ngineering Center 
of Purdue University. He was initially appointed to the Cardiovascular Devices 
Panel in September 1974 and has served intermittently ever since, with his last 
reappointment being January 1977. 

For this latest reapjiointment, panel member A reported on his Confidential 
Statement of Employment and Financial Interests, dated September 28, 1976, 
and in a subsequent interview with an FDA official, that he is currently the 
principal investigator on a $140,000 grant to Purdue University from the" New 
Dimensions in ^Medicine Company. He personally applied for the grant and 
approximately 5-10 percent of his salary is included in the grant amount. The 
grant was for the purpose of evaluating an electrosurgical electrode,^ which is 
regulated b}^ the Cardiovascular Devices Panel. 

On his HE\V-410, "Supplemental Information-Expert or Consultant," for the 
January 1977 reappointment, a restriction was made specifically excluding him 
from participating in any FDA matters dealing with New Dimensions in Medicine 
Company and especialh' their electrosuigical electrode. 

A public disclosure memorandum was issued in January 1977 concerning panel 
member A's involvement with the FDA regulated firm. The memorandum stated 
in part: 

"Although [panel member A] has not participated in Committee matters per- 
taining to the New Dimensions in Medicine Company, the Food and Drug Ad- 
ministration and [panel member A] recognize that a potential for future conflict 
of interest would exist if he, as an FDA employee were to review any products of 
this firm. However, to avoid this situation, FDA and [panel member A] have 
agreed that his appointment to FDA is subject to the requirement that he dis- 
qualify himself from participating in any official FDA matters relating to the New 
Dimensions in Medicine Company." 

At the panel's April 1977 meeting, attended by Subcommittee staff, electro- 
surgical electrodes were on the agenda for classification.^ With the knowledge that 
the Subcommittee staff would either follow up on or attend this meeting, the ex- 
ecutive secretarj' of the panel discussed conflicts of interest and informed all those 
present of the panel members' association with FDA regulated firms, including 
panel member A's association with New^ Dimensions in Medicine's electrosurgical 
electrode. He stated that in classifying m.edical devices by generic categories, the 
Bureau has never considered that a conflict of interest exists Avhen a panel member, 
who is participating in one of these activities, has or has had specific ties with an 
individual manufacturer of the class of devices being considered: since not only 
that manufacturer, but all manufacturers of the device are affected equally by the 
panel's recommendation. 



1 The panel, which report<: to the Biirean of Medical Devices and Diagnostic Products, review? and 
evahiates all available information concerning the safety. efTectiveness. and reliability of medical devices 
currently under the anthoritv of this panel in order to detennine the nature of the regulatory category 
most appropriate for the adequate control of these devices. The panel will attempt to identify problems 
and will recommend specific standards for those devices which can best be controlled and regulated by 
setablished standards. , , , , , i. 

» Medical device which is used to cut body tissue and coagulate bleeding blood vessels when used in con- 
junction with an electrosurgical device which tran.^mits electrical current. 

3 This panel, as well as the other medical device classification panels in the Bureau, recommends classi- 
fication by generic devices category .There are three classes; (1) Class I— requires the manufacturers to com- 
ply with registration requirements, good manufactiuing practices, and other general tjT>es of regulatory 
requirements; (2) Cla^^s II— requires manufacturers to comply with performance statidards when such 
standards are adopted by FDA: and (3) Class III— requires manufacturers to submit data to FDA showing 
tiiat their devices are safe and effective. 

(67) 



68 

After the presentation by the executive secretary on conflicts of interest, 
electrosurgical electrodes were recommended by the panel for classification in 
Class II. There was minimal discussion on the classification with panel member A 
participating. He was not asked to exclude himself on this classification during 
or prior to the meeting by the executive secretary, nor did he withdraw voluntarily 
from the discussion bearing on the devices in which he had a professional and 
financial interest. 

FDA CASE STUDY B 

Case study B involves the Chairman of the panel on Review of Dentifrices and 
Dental Care Agents.* Panel chairman B is Professor of Oral Biology and Coordi- 
nator of Pharmacology at the Medical College of Georgia. He has served as chair- 
man of the panel since March 1973. He was reappointed in July of 1974, 1975, 
and 1976. 

For his July 1976 reappointment, he reported on his Confidential Statement 
of Employment and Financial Interests, dated December 1975, and in a sub- 
sequent interview with an FDA official in April 1976, that grants were provided 
to his university for studies which he worked on from Parke Davis for $15,000 
and Warner-Chilcott for $5,000. Although he does not receive any personal fees, 
panel chairman B stated that he consults directly with Parke Davis on the study. 
In addition, he is the principal investigator on the Warner-Chilcott study. His 
HEW-410 for the July 1976 reappointment specifically excluded him from par- 
ticipating in any matters relating to Warner Lambert or its Warner-Chilcott 
Division and Parke, Davis & Co. subsidiary. 

Prior to his July 1976 reappointment, in view of the grants panel chairman 
B had received from firms with submissions ' to the panel, it was decided that 
this information should be given to the OTC Drug Review Steering Committee • 
for its review concerning his reappointment. Warner Lambert had made eleven 
separate submissions to the Panel from April 1974 through May 1976. At the 
meeting of the OTC Steering Committee in June 1976, it was decided that the 
reappointment of panel chairman B was in the public interest to insure the com- 
pletion of the panel's report. The panel was expected to issue its report to the 
Commissioner in the near future. To dispel any question of the appearance of a 
conflict of interest, the OTC Steering Committee decided that panel chairman's 
B reappointment would be made dependent upon his signing a public disclosure 
memorandum setting forth the facts concerning the grants he had received from 
FDA regulated firms during the past 12 months. 

In July 1976, FDA issued a public disclosure memorandum concerning panel 
chairman B's involvement with Parke Davis and Warner-Chilcott. The memo- 
randum also stated: 

"[Panel Chairman B] has agreed to refrain from participating in any FDA 
matters relating to . . . Warner Lambert and its Parke-Davis and Warner- 
Chilcott Divisions . . ." 

Summary minutes for the August and October 1976 panel meetings show that 
tentative recommendations or changes in tentative recommendations were made 
on generic categories of products for which Warner Lambert had made submis- 
sions.^ According to the panel administrator, panel chairman B was not asked 
to exclude himself on these recommendations, nor did he withdraw voluntarily. 



« The panel, which reports to the Bureau of Drups, advises the Commissioner of Food and Dnigs on the 
safety and effectiveness of currently-marketed nonprescription dnip products for human use containing 
dentifrice and dental care ingredients and reviews and evaluates available data on these products, the 
aderiuacy of their labolinp, and advise on the promulgation of monogranhs establishing conditions under 
which these over-the-coimter (OTC) drug products are generally recognized as safe and efTective and not 
misbranded. The panel also serves a fonim. for the exchange of views regarding the prescription or non- 
prescription status of these various active ingredients and combinations thereof. 

» A body of published or unpublished scientific data including studios, market histories, labeling, and 
other pertinent infonnation on ingredients in ageneric product voluntarily provided to the panel in response 
to FDA's call for the data in the Federal Register at the beginning of the panel's review. Additional data 
may be provided at any time prior to the completion of the panel's review. The va«t majority of data is 
provided by firms manufacturing dnigs in the generic clas-J. although not all such firms will siibmit data. 

• E.stablished by the FDA Commi.ssioner to provide broad guidance and to resolve policy issues in the 
OTC drug review. Additional responsibilities included approving nominees to serve on OTC advisory 
committees. 

"> This panel, as well as the other OTC panels in the 'Bureau of Drugs, reviews drugs by generic categories. 
I.e., they will review cla'^ses of OTC drugs according to their active ingredients and not individual brand 
names. At each meeting, tentative decisions are reached on the classification of generic categories reviewed. 
Cla<;sifications fall into (1) Category I — safe and efTective; (2) Category II— not safe and/or effective, or 
f3) Category III— insufficient information. At the completion of the panel's review of the generic categories, 
It will <:ubniit a report containing its conclusions and recommendations to the Commissioner. Changes are 
possible in the.<:e decisions (from tentative to final); panel members may change their minds based on the 
existing evidence or new evidence submitted. 



60 

^v,'^^ ^^^H administrator told the Siihcommittoe stafT that ho was aware of 
the Farke Davis & Co. and Warnor-Chilcott involvoniont of panel chairnian 
13, but It did not strike him as a conflict since the; panel deals with product iiiKredi- 
ents on a generic basis only, and not individual companies. 

FDA CASE STUDY C 

Case Study C involves the Chairman of the Panel on Review of Internal Anal- 
gesic mcluding Antirheumatic Drugs.s Panel chairman C is Professor of Anesthe- 
sia at the LCLA School of Medicine. Serving as a nu;mi^er on the panel since 
VniS^^T^ ^^^' ?^ ^^'^^^ reappointed in July of 1973, 1974, and 1975 and August 
197b. During the past year he became the panel chairman. 

Prior to the panel chairman C's reappointment in August 1970, he submitted 
a Confidential Statement cf Employment and Financial Interests, dated Decem- 
ber 197o, stating his involvement in FDA regulated firms within the past 12 monthi,. 
A^u o '''''^^^ grants to the university for studies which he worked on from (1) 
^on^"^n ?^^^^"^ ^°^' ^^'250 which began in October 1975, (2) Bristol Laboratories for 
^20,000 beU\'Oen July and December 1975, and (3) Wyeth Laboratories for $22,000. 

On his HEW -410 for the August 1970 reappointment panel chairman C was 
specifically excluded from advising on matters relating to A. II. Robins, Wyeth 
Laboratories, and Bristol Laboratories or its parent firm, Bristol-Myers. 

While panel chairman C served on the panel, business came before the panel 
from the companies supporting his work. These included submissions to the 
panel from A. H. Robins and Bristol-Myers in September 1972 and August 1970. 
7^r^^^^^^^^ ^^ *^^"^® submissions, Bristol-Myers and American Home Products 
(Wyeth Laboratories is a subsidiary) made a joint presentation to the panel 
at its April 1970 meeting. The presentation was in response to the panel's proposed 
deletion of the word arthritis from presently used labehng for analgesic and 
anti-inflammatory OTC products. The question of hsting arthritis was discussed, 
but the panel again confirmed their initial decision. 

In view of the fact that panel chairman C has been provided grants from 
Bristol, a division of Bristol-Myers, and A. H. Robins with products submitted 
to the panel, the question of his reappointment to the panel was submitted to 
the OTC Drug Review Steering Committee. At its June 1970 meeting the Steer- 
ing Committee decided that the reappointment of panel chairman C was in the 
public interest to insure completion of the panel's report. In a memorandum 
accompanying a draft pubUc disclosure memorandum to the Director of Policy 
Management, an FDA official stated in part: 

*'In order to dispel any question of the appearance of a conflict of interest 
on the part of [panel chairman C], the [Steering] Committee decided that his 
reappointment would be made contingent upon his signing a public disclosure 
memorandum setting forth the facts concerning the grants he had received from 
FDA regulated firms in the past twelve months." 

In March 1977 a public disclosure memorandum was issued which stated in 
part: 

"Although these firms made specific reference to their products while mak- 
ing submissions to FDA for consideration, the panel's concern was to review 
the ingredients in the products involved rather than the products themselves 
. . . Since the OTC Panel's review is of the ingredients found in over-the- 
counter internal analgesic products, not the particular products of any one 
firm, and since over 150 volumes of data were received relating to analgesic 
formulations, . . . the Food and Drug Administration has concluded that 
{panel chairman C] could not have intervened favorable on behalf of any of the 
firms described. A review of the record of the panel supports this conclusion. 
Furthermore, [panel chairman C] and FDA officials have agreed that although 
he should be disqualified from participating in the review of any specific pioducts 
marketed by any of these firms, he should not be disqualified from participating 
in decisions respecting the safety and effectiveness of an ingredient marketed by 
several manufacturers and available for use by many manufacturers ... In 
view of a possible concern by the general public over the appearance of a conflict 



» The panel, which reports to the Bureau of Drugs, reviews and evaUiates available data concerning the 
safety and elTectiveness of active ingredients, and combinations thereof, of currently marketed nonprescrip- 
tion dnig products for human use containing analgesic and antirheumatic ingredients, the adequacy of their 
labeling, and advises the Commissioner of Food and Drags on the promulgation of monographs establishing 
conditions under which these over-the-counter (OTC) drug products are generally recognized as safe and 
effective and not misbranded. The panel also serves as a forum for the exchange of views regarding the 
prescription or nonprescription status of these various active ingredients and combiaations thereof. 



of interest on the part of [panel chairman C] because of his work on studies funded 
by drug companies that market products being reviewed by the Internal Analgesic 
Panel, the Food and Drug Administration has decided that these facts should be 
publicly disclosed." 

According to the panel administrator, panel chairman C has never excluded 
himself nor has he been reminded to exlude himself from participation on any 
matter, including those pertaining to A. H. Robins, Bristol ]Myers, or its Bristol 
Laboratories Division and Wyeth Laboratories, a subsidiary of American Home 
Products. 

The panel administrator told the Subcommittee staff that there have been no 
major changes in the panel's tentative recommendations.® Summary minutes for 
the August 1976 meeting point out that there were technical changes and minor 
modifications made in the draft report. These included generic categories for 
which A. H. Robins and Bristol-Myers had made submissions. At the panel's 
last formal meeting in November 1976, the discussion included two Bristol-Myers 
products by brand names which had been submitted to the panel. No change 
occurred in the panel's classification concerning this generic category which 
included the two Bristol-^SIyers products. Panel chairman C was not asked to 
exclude himself nor did he withdraw voluntarily from the discussions. 

The panel administrator told the Subcommittee staff that she was aware of 
panel chairman C's involvement with the FDA regulated firms which had sub- 
missions to the panel. She said that she was not concerned with his participation 
after the August 1976 reappointment because the panel deals with product 
ingi-edients on a generic basis only and the major decisions of the panel had been 
made prior to panel chairman C's involvement with these firms. 

FDA CASE SXrDY D 

Case Study D involves a member of the Anti-Infective Agents Advisory Com- 
mittee. ^o Committee member D is Director, Division of Clinical Pharmacology 
and Associate Professor, Department of Medical Pharmacology and Pediatrics 
at the Johns Hopkins University. He has served on the committee since August 
1974 being reappointed in August 1975 and November 1976. 

Concerning his 1975 reappointment, two Confidential Statements of Employ- 
ment and Financial Interests were in committee member D's case file. Both of 
the statements were completed by committee member D and dated March 28, 
1975, but only one of the statements was completed by FDA. The statement 
completed by committee member D and FDA listed a study for Bristol Labora- 
tories while the statement completed only by committee member D listed the 
Bristol Laboratories study and a study for Lilly Laboratories, a division of 
Eh Lillj'. FDA officials could not explain why there were two statements in 
his file. Committee member D's HEW-410 did not include any exclusions for 
Bristol-Myers or its Bristol Laboratories Division and Eli Lilly or its Lilly Lal)ora- 
tories Division. 

At a June 1975 meeting, the committee discussed and made a recommendation 
on a submission by Eli Lilly which was also presented by EYi Lilly personnel. 
The executive secretary of the committee told the Subcommittee staff that 
committee member D did not alert her to the possil)le conflict nor was she aware 
of his involvement with Lilly Laboratories at the time. Thus, he particii)ated 
in the discussion which questioned whether cephaloridine ^^ should be taken off 
the market because of its renal toxicity. 

The committee unanimously agreed to recommend that cephaloridine should 
not ])e taken off the market. The executive secretary told the Subcommittee 
staff that the rationale provided by the committee was a "peculiar one," The 
reason was that cephaloridine was effective for so-called "dirty surgery," i.e., 
surgery in the bowel area, although the ])roduct's label gave no indication of 
"dirty surgery" as a possible use or limitations to such surgery. 



' This panol, as well as tho olhrr OTC panels noted in case B. has boon makinp lenfativo decisions on 
the classification of geiieric cat'cories reviewed at its periodic meetinRs. The panel is expected to issue its 
Imal report to the (.'oniniissioner within ilie near fulure. Again as is l he case wit li ease H, changes are pdssible 
in their tentative decisions, up inilil the release of the re|K)rt by the patiel. 

'• The committee, which serves the Bureau of Drugs, reviews and evaluates all available data concerning 
the safetv and efTectiveness of presently marketed and new prescrii)tion druc products proposed for market- 
ing for use in the treatment of infectious diseases and advise the Commissioner regarding current advances, 
changing concepts, and trends in the field. 

'4 IVnicillin-like, antibiotic. 



71 

For his 1976 roappointniont, roniiuittro nionilxT D's Confidential Statoinfnt 
•of P^mployment and Finnncial Intorests, dated May 107(), stated that he has 
been involved in two studies sponsoreci by Lilly Laboratories. Connnitteo mem- 
ber D was the principal investii^ator for the two studies awarded to the university 
for approximately $1S:J,0()0. One stu<ly started in October I*)?.') while the otheV 
started in Decenib<'r 1975. Both will terminate in June 1977. The study which 
started in Octol)er 1975 was noted on committee memb<'r D's March 1975 confi- 
dential statement mentioned above. On his 1I1']\V-410, an exclusion from i)ar- 
ticipating in any matters pertaining to Lilly Luljoratories was noted. 

In addition, a public disclosure memorandum was issued in November 1970 
noting his involvement with Lilly Lal)oratori<vs on the two above-mentioned 
studies. The memorandum further stated that a potential for future conflict 
of interest would exist if he, as an FDA employee, were to review prorlucts of 
his firm and to preclude even an appearance of conflict of interest, FDA and 
committee member D agreed that his reappointment was subject to the require- 
ment that he disqualify himself from particpating in any official FDA matter 
relating to Lilly Lal)oratories. 

The executive secretary furnished the Subcommittee staff in March 1977 
with the data she uses to check for conflict of interest in the case of committee 
member D which is similar to the data used for checking other committee members 
on this committee and the other two committees which she presides over. The 
data did not include the HEW-410. Included was an internal memorandum 
dated August 1970 noting the need for a pul)he disclosure with a draft memo- 
randum enclosed. The executive secretary told the vSubcommittee staff that this 
was the first time she knew of committee meml)er D's involvement with Lilly. 

Committee member D's involvement with Lilly was noted on his March 1975 
Confidential ^Statement of Employment and Financial Interests but for some 
reason was not noted on his HEVV-410. The executive secretary of the committee, 
the individual who has responsibility for policing conflicts of interest, was not 
aware of his involvement with Lilly until August 1976. 



APPENDIX VI (a) 

Food and Drug Admixistration Conflict of Interest program Documents^ 

(a) HEW Form 410 (blank). 

(b) Sample Public Disclosm-e ^Memorandum (PRDC Memorandum). 

(c) Excerpts from FDA's "Staff Manual Guide — Protection Against Conflict 
of Interest — Special Government Employees," October 1976. 

SUPPLEMENTAL INFORMATION - EXPERT OR CONSULTANT 
(Sifbmit with request for Personnel Action, SF-52) 



1 NAME OF PERSON (Last. /irst. middle iniliai) 


2. TOTAL PERIOD FOR WHICH APPOINTMENT IS 

REQUESTED [eiUtre year (i6i days) or a shorter period\ 


3. MAILING ADDRESS 






4. APPROXIMATE NUMBER OF DAYS PERSON IS EX- 
PECTED TO PERFORM SERVICES DURING THIS PERIOD 



5. SERVICES TO BE PERFORMED: 



A, EXPLAIN IN FULL THE SERVICES TO BE PERFORMED: 



C. SPECIFY WHAT DUTIES WILL BE ASSIGNED THAT WILL INVOLVE THE PERSON IN THE RENDERING OF ADVICE TO THE GOVERN 
WHICH WILL HAVE DIRECT AND PREDICTABLE EFFECT OH THE INTERESTS OF ANY PROFIT OR NON-PROFIT ORGANIZATION: 



6. SPECIALQUALIFICATIONS OF THE PERSON RECOMMENDED FOR APPOINTMENT (List Ibose which Ttlmt specifically «o the services 

lo be performed) 



7 SIGNATURE AND TITLE OF OFFICIAL AUTMOBIZED TO BEQUEST SERVICES 



(72) 



APPENDIX VI (b) 

University of California, Los Angelks, 

Department or Anesthesiology, 

SciIOO L O F M E I) h: I X K, 

_ ^, , , Los Angeles, Calif. 

lo: Memorandum for the public record. 

Subject: Reappointment of J. Weldon Bellville, M.D. as a moinl)or of FDA's 
Panel on Review of Internal Analgesics Including Antirheumatic Drugs. 

Dr. Bellville is Professor of Anesthesia at the UCLA School of Medicine, Los 
Angles, California. Pie has served as a member of FDA's Panel on Reviow of 
Internal Analgesics Including Antirheumatic Drugs since October 2, 1972. He 
was reappointed to this position in 1973, 1974, and 1975. On August 1, 197G, 
Dr. Bellville became Acting Chairman of the panel, and he is now under considera- 
tion for reappointment to that position. 

In connection with this reappointment, Dr. Bellville furnished the Food anrl 
Drug Administration with the following information concerning grant-supported 
studies upon which he worked. 

1. Pfizer. — A $30,000 grant to study h5a-oxyzine. 

2. Bristol. — A $20,000 grant to study butorphanol l^etween July, 1975 and 
December, 1975. A preliminary report of this study is in press. This'was a Phase 
III study of a narcotic antagonist. 

3. Riker. — A $12,000 grant for a study of nefopam. In the near future Dr. 
Bellville will undertake a new study for the firm under a $10,250 grant to study 
nefopam, dextroamphetamine, and pentazocine. 

4. A. II. Robins. — A $6,250 grant to study doxapram. Partial support for this 
research was also provided by a grant from the National Heart and Lung Institute 

(HL15659). The study began in October 1975. 

5. Wyeth Labs. — A $22,000 grant to study two investigational drugs (WY- 
10,225 and WY-15,705 at (11,000 each). 

These grants were made to the Regents of the University of California and 
Dr. Bellville received no personal financial benefit. Each of the grants shown 
above covered studies of investigational prescription drugs, and did not involve 
non-prescription internal analgesics. Three of the firms mentioned — Bristol Labs, 
a subsidiary of Bristol Myers; A. H. Robins; and Wyeth Labs, a subsidiary of 
American Home Products, have submitted products for review by the panel 
chaired by Dr. Bellville. Although these firms made specific reference to their 
products while making submissions to FDA for consideration, the panel's concern 
was to review the ingredients in the products involved rather than the products 
themselves. The ingredients — aspirin, caffeine, salicylamide, and acetaminophen — 
are found in a large number of the 50,000 separate internal analgesic products 
on the market. 

Aspirin appears in about 95 percent of these products. Since the OTC Panel's 
review is of the ingredients found in over-the-counter internal analgesic products, 
not the particular products of any one firm, and since over 150 volum.es of data 
were received relating to analgesic formulations, including 54 aspirin product 
formulations, the Food and Drug Administration has concluded that Dr. Bellville 
could not have intervened favorably on behalf of any of the firms described. A 
review of the record of the panel supports this conclusion. Furthermore, Dr. 
Bellville and FDA officials have agreed that although he should be disqualified 
from participating in the review of any specific products marketed by any of these 
firms, he should not be disqualified from participating in decisions respecting the 
safety and effectiveness of an ingredient marketed by several manufacturers and 
available for use by many manufacturers (e.g., aspirin, caffeine, salicylamide, and 
acetaminophen). In view of a possible concern by the general public over the 
appearance of a conflict of interest on the part of Dr. Bellville because of his work 
on studies funded by drug companies that market products being reviewed by the 
Internal Analgesic Panel, the Food and Drug Administration has decided that 
these facts should be publicly disclosed. 

(73) 



74 

A copy of this memorandum in being furnished to the FDA Public Records and 
Documents for review by interested members of the public. 

(a) I agiee that the above information may be made available to the public. 
(Mar. 18, 1977.) 

J. Weldon Bellville, M.D. 
(h) Recommend approval of appointment of Dr. Bellville. (Mar. 21, 1977.) 

Calvin Leventhal, 
Deputy Director, Bureau of Drugs. 

(c) Concur in recommendation. (Mar. 22, 1977.) 

R. Merrin, 
Assistant General Counsel FDA Division, 

(d) Approval granted. (Mar. 25, 1977.) 

J. Donald Henson, 
(For Associate Commissioner for Administration). 



APPENDIX VI (c) 
Staff Manual Guide — Food and Drug Administration 
(Guide FDA 3118.2) 
Personnel 

protection against conflict of interest special government employees 

1. Purpose. 

2. Applicability. 

3. Employee Responsibilities. 

4. Federal Conflict of Interest Statutes. 

5. Interpretation of Certain Statutory Terms. 

6. Preappointment Screening. 

7. Investments. 

8. Employment. 

9. Grants and Contracts. 

10. Investigators of Products Subject to Premarket Clearance. 

11. Restrictions on Post-Employment Activities. 

12. Summary of Restrictions. 

1. Purpose. — The purpose of this guide is to set forth Agency policy and pro- 
cedures for avoiding conflicts of interest on the part of special Government 
employees (SGE's), and dealing with the appearance of such conflicts. 

2. Applicability. — These regulations apply to all SGE's serving as FDA advisory 
committee members, panel members, ad hoc consultants and advisors, and 
expert reviewers. Employees of other Federal agencies (e.g., NIH, VA) who 
serve FDA in the above-mentioned capacities are also expected to comply with 
these regulations for purposes of Federal Conflict of Interest Statutes and Depart- 
ment Standards of Conduct Regulations. These regulations do not apply to state 
or local Food and Drug Ofl^icials commissioned under the Food, Drug and Cosmetic 
Act, or other Acts administered by the Agency. 

3. Employee responsibilities. — An SGE must conduct himself according to 
ethical behavior of the highest order. He must refrain from any use of his position 
which is, or even appears to be, motivated by a private gain for himself or other 
persons. To comply with these requirements, an SGE should familiarize himself 
with the Federal Conflict of Interest Statutes quoted from the following section; 
Subpart "L" of the DHEW Standards of Conduct (Attachment A); the CSC 
Regulations covering Prohibitions on Conduct (Attachment B) ; and Subpart 
*'G" of the FDA Procedural Regulations (Attachment C). One must also be 
familiar with the specific FDA guidance provided in this document. In circum- 
stances where this guidance is not specific or clear, it is the employee's respon- 
sibility to seek advice on such matters. The Executive Secretary of the committee 
or panel with w^hich he is serving and/or the Committee ]\Ianagement or admin- 
istrative staffs of the FDA Bureau, Regional Office or other sub-organization 
which processed his appointment can refer an SGE to the appropriate FDA 
oflBcials who will assist in resolving such questions. 

4. Federal conflict of interest statutes. — The Federal statutes pertaining to Con- 
flict of Interest provide the basis for Civil Service Commission, Departmental, 
and Agency regulations. All prospective SGE's should familiarize themselves with 
the relatively brief statutes which are reproduced in full below. 

18 U.S.C. §208. Acts affecting a personal financial interest 

[See appendix I of this report.] 

5. Interpretation of certain statutory terms. — Tlie Conflict of Interest Statutes and 
regulations are designed intentionallj^ to cover a variety of employment situations 

(75) 



76 

and relationships with private sector organizations in government agencies with 
widely differing missions. As a result, the statutes contain several key statements 
and phrases which need to be given a specific interpretation in the light of FDA's 
-regulatory role and its specific use of SGE's: 

(a) Personal and Substantial Participation. — Each of the aforementioned 
Federal Conflict of Interest Statutes apply specifically when an SGE participates 
"personally and substantially" in a particular matter. As a general principle, 
participation "personally and substantially as an ... SGE" shall be deemed to 
have occurred in a particular matter if the SGE conducted an in-depth review of 
an application or a special evaluation of data (e.g., expert review of an IND or 
NDA, food additive petition, product preclearance, or detailed review of data 
submitted to an OTC panel), or if the SGE has served as chairman of an advisory 
committee or panel. 

There have been a number of questions about the extent to which participation 
by a member of an advisory committee (as opposed to the chairman or experts) 
should be considered personal and substantial. The Agency has considered this 
question carefully and although the extent to which a single committee member 
could influence the outcome of a committee may be somewhat less than the chair- 
man or an expert reviewer, the agency has concluded that participation would 
probably be considered "substantial" by those most familiar with these statutes 
and responsible for interpreting them whenever a committee acts through a 
decision, recommendation, approval, disapproval, the rendering of advice, or 
other action described in 18 U.S.C. 205 (with or without a formal vote). 

This is important because 18 U.S.C. 207 places certain restrictions on the post- 
employment activities of an employee, including an SGE, concerning any par- 
ticular matter in which the employee has personally and substantially partici- 
pated. However, FDA believes most questions which might concern an SGE in 
this regard will ordinarily be resolved on the basis of whether the participation 
involved a particular matter, or the same particular matter, rather than whether 
the participation was personal and substantial. This is discussed in Section 5b 
below. 

It is not the intention of the FDA to preclude SGE's from continuing to work 
in their field or to place them in danger of violating the law. Therefore, the Agency 
is prepared to advise present and former SGE's in any situation where an SGE 
is uncertain whether his current or past participation on behalf of FDA would 
be considered as "personal and substantial." Section 11 of this guide discusses 
post-employment restrictions in greater detail. 

(b) Particular matter involving a specific party. — Each of the aforementioned 
Federal Conflict of Interest Statutes also applies specifically when an SGE is 
involved with a "particular matter involving a specific party or parties in which 
the United States is a party." This wording is important, because where a par- 
ticular matter is considered there is the possibility of post-employment restrictions 
on current and former employees as defined in 18 U.S.C. 207. In many situations 
in FDA, this phrase can be understood and applied easily. For example, an 
individual product manufactured by a single firm which is the subject of a pre- 
market clearance review or other regulatory action is clearly a "particular matter." 
A particular matter may involve only a specific use of a single product, e.g., an 
NDA requesting a new indication for an approved drug. In such cases, identifi- 
cation of the particular matter is relatively easy. In some cases, however, partici- 
pation involves assistance in the formulation of general policy guidelines or 
procedures. Policy guidelines and procedures afi'ecting a number of products are 
generally not considered particular matters by FDA. 

It is the conclusion of the Agency that products of different firms, even if 
chemically identical, are different particular matters so long as they are the 
subject of separate petitions or applications, and receive separate reviews. On 
the other hand, the Agency has concluded that decisions relating to different 
quantities or dose levels of the same product used for the same indication or 
purpose are not different particular matters. 

Other situations present more diflRcult judgments. Opinions vary about whether 
different indications or uses of the same product are to be considered the same 
particular matter. In situations whore the indications for use or purposes are 
closely rela,ted, FDA would err on the side of concluding that the decisions re- 
specting them comprise the same particular matter. Where the indications are 
clearly unrelated, FDA would generally consider decisions respecting them to be 
different particular matters. 



Activities such as the development of monogr;i,i)hK concerning; Over-the-Countcr 
Drugs and the development of standards for classes of medical devices contem- 
plated in the recent enactment of PL 94-295 descsrvo separate; m(!ntir)n. In one 
sense these are broad policy documents concerned with ingr(;di(»nts (;r componentfl 
that do not ordinarily have any propri(;tary value and may have been or will 
be in the future used by many difrerent firms in many (Mavimt products. A mono- 
graph or standard itself is clearly not a particular matter. Representing a jjroduct 
covered by the monograph or standard which includes cmly ingredients or com- 
ponents common to many products would not ordinarily be vicwcjd jus returning 
to the Agency on the same particular matter. Similarly, repres(!nting a product 
which was developed after the applicable monograph or standard was developed 
would not be considered returning to the Agency on the same parti(;ular matter. 
However, some products have an ingredient or component that is product specific,* 
i.e., unique to that product. Where a monograph or standard deals with a product 
specific ingredient, the Agency would consider a decision respecting the ingre- 
dient to be a particular matter, and the SGE should not represent the product 
before the Agency in the future without a specific statutory exemption. There 
will always be instances in attempting to apply these criteria where judgment 
will be required. In any instance where an SGE is not certain of his legal exposure, 
he should seek advice from the Agency as described in Part 3 of this Stair Manual 
Guide. 

Once having established that a particular matter exists, an SGE must deter- 
mine if he faces any potential conflict of interest because of the firms involved. 
Normally, he must only be concerned if he or other persons specified in the statutes 
have an interest in the firms involved. But, there are occasional circumstances 
when an SGE should avoid participation in particular matters involving firms 
in which he has no interest. 

An SGE should avoid participation in a particular matter involving a specific 
firm if there is any genuine likelihood of involvement with that firm on the same 
matter subsequent to employment with FDA (see Section 11). 

An SGE should avoid participation in a particular matter if his financial 
interests, although not directly involved in the matter, would be "directly and 
predictably affected" by the outcome of the matter. The Department's regulations, 
in explaining 18 U.S.C. 208, instruct that an SGE should not participate in a mat- 
ter which will have a "direct and predictable effect" on the SGE's financial inter- 
ests. There are a variety of circumstances under which an SGE's participation 
might appear to have a direct and predictable effect on an SGE's financial interests 
even though the specific matter under consideration does not involve a firm in 
which the SGE has an interest, e.g., an adverse decision on a competitor's product 
in a market where only two firms compete. The Agency frequently will not be 
able to foresee all such situations at the time of appointment. Thus, SGE's must 
exercise judgment in avoiding participation in such situations and should seek 
Agency advice whenever a question arises. 

(c) Financial interest. — The phrase "financial interest" contained in 18 U.S.C. 
208 shall include interests of an SGE, the spouse, minor child, partner, or organi- 
zation with which the SGE is employed or negotiating employment. The interests 
include financial assets, investments, salaries, consultant fees, retainers, or con- 
tractual relationships with firms involved with products regulated by the particu- 
lar FDA bureau/office employing the SGE. The term "firms" is used repeatedly 
in Sections 7, 8, 9, and 10 of this guide, and in those Sections it shall apply only 
to firms involved with products regulated by the particular FDA bureau/oflSce 
employing the SGE. 

Interests also include research grants and contracts to the laboratory under an 
SGE's direction, special support such as an endowed professional chair, the em- 
ployment of a spouse or minor children, as v*^ell as any payments "in kind." 
"Personal financial interest" shall not ordinarily include grants or contracts to 
the SGE's university which are controlled by other members of the faculty, or 
investments in corporations held by the university since these financial interests 
are generally considered "too remote" as defined in 18 U.S.C. 208(b)(2). Addi- 
tional interests that are considered "too remote" or "too inconsequential" are 
discussed in Sections 7 and 8. 

6. Preappointment screening. — The statutes do not establish any restriction on 
the decision to employ individuals who have significant financial interests related 
to employment activities. Rather, the statutes place the responsibilit\' on the indi- 
vidual during and after his employment to avoid any situations involving the 



78 

appearances of, or real conflict of interest. Therefore, as a strict legal matter, an 
agency may adopt a policy of appointing any qualified individual as an SGE, re- 
gardless of his financial interests, providing the Agency ensures conformance with 
the statutory requirement (i.e., avoidance of conflict or their appearances) during 
and after an individual's appointment. FDA has determined however, that a more 
stringent policy is warranted for several reasons : 

The appointment of many individuals with significant financial interests related 
to FDA activities would increase the probability that a statutory violation could 
occur through carelessness or ignorance. 

Public confidence in FDA's decisions could be affected adversely if many SGE's 
were believed to have significant financial interests related to FDA activities, even 
though each individual SGE scrupulously complied with the statutory require- 
ment to avoid participation in particular matters involving his financial interests. 

Employment of an SGE with financial interests that would significantly restrict 
his activities may not be an optimal utilization of Agency funds since he would be 
excluded from matters in which an individual with fewer or no financial interests 
could participate. 

For the preceding reasons, FDA has established a requirement that potential 
SGE's be screened thoroughly for possible confiicts of interest prior to their 
appointment so that any limitations on participation are established before the 
Agency appoints an individual. These limitations fall into three general categories: 

No restriction on an SGE's participation. 

Disqualification from participation in particular matters (including specific 
products, etc.) related to specific firms. 

Disqualification from participation in matters related to specific firm plus 
puV)lic disclosure of any substantial interests. 

Whenever possible, the Agency prefers to appoint individuals whose financial 
interests in firms defined in Section 5c of this Guide are not substantial. However, 
there are situations where availalDle manpower in a specific scientific discipline 
is extremely limited in number, and/or only a few individuals have specifically 
needed qualifications. Moreover, certain individuals, such as industry and con- 
sumer representatives to advisory committees and members of the National 
Food and Drug Advisory Committee, are selected as SGE's precisely because 
of their specific point of view or interests. 

Where an individual has financial interests or other circumstances that might 
make his objectivity subject to question, FDA may appoint such an individual 
after caroful review but require public disclosure of the interest prior to appoint- 
ment, which will protect the Agency, the individual, and public confidence in 
FDA. In these cases the Commissioner or his designee will approve the appoint- 
ment. 

The threshold standards for the three preceding categories, which generr.Uy 
correspond with increasing financial interests or degree of involvement in matters 
related to FDA activities, are described in the following sections. Notwithstand- 
ing these thresholds or the language in section 5c which limits FDA's concern 
with an SGE's financial interests to only those which are related to products 
regulated by the appointing bureau, the Agency shall always exercise reasonal^le 
judgment in making appointments and/or requiring disclosure. In no instance 
shall this preclearance process permit an SGE to participate in a particular 
matter in which he has an interest, unless the conditions and procedures set forth 
in 18 U.S.C. 20S(b) have been met. 

7. Investments. — Investments are a category of financial interests which are 
defined for purposes of this guide to include an}^ type of financial asset such as 
stocks, bonds, options, notes or partnership shares which an individual SGE, his 
(or her) spouse, minor chikl, partner, employer, or prospective employer owns 
in firms involved with products regulated by the particular FDA bureau/office 
with which the prospective SGE will serve. 

(a) Very modest investments do not warnmt any restrictions on an SGE's 
participation as arlvisory committee mem])er. (JencM'i'.lly, investments in a single 
firm of less than $1,000 current market value will be considered "too inconse- 
quential to afTi'ct th(^ integrity of Government oflicers or eniployees' ser\ I- e" 
as flefined in 18 U.S.C. 208(b)(2). Also, investments in a corporate pension i'u-^xi, 
or a university endowment th.it are not known or readily determinable by an 
individual ar(; considered "too remote" as defined in 18 U.S.C. 208(b)(2). Similarly, 
(•()r[)orate pension funds and university endowments composed of diversified 
investments arc generally considered "too remote". However, in cases where the 



79 

source of funds is principally from a firm definod in Section 5c, a restriction on 
SGE participation may bo necessary and will \w included. 

(6) Certain levels of investments will require an individual to be disqualified 
from participating in matters involving the firm in which he has investments. 
Generally, any investments by a consultant or expert reviewer, and inveKtments of 
more than $1,000 by advisory committee members will require disqualification. 
An SGE will be informed of these exclusions in writing at the time of apijointnient. 

(c) Investments of substantial amount or unusual nature will rcK^uire an in- 
dividual not only to be disqualified from matters involving the firm in which he 
has investments, but also to make public disclosure of such holdings when ap- 
pointed. Investment in a single firm which exceeds $5,000 current market value 
is considered to be an amount requiring public disclosure. In addition to the dollar 
threshold, other circumstances may also warrant public disclosure, (\g., a com- 
bination of investments, a retainer and contracts involving a single firm, or some 
othei- exceptional situation which might be viewed as potentially embarrassing 
to the Agency, or misleading to the public. All public disclosure situations will 
require the approval of the Commissioner or his designee. 

(d) The Agency would prefer that SGE's not alter investments in firms defined 
in Section 5c during their period of service. However, in the event that invest- 
ments in such firms do change, the SGE should notify the Agency immediately 
so that any restiictions on his participation can be modified accordingly. Individf- 
uals should not make substantial investments that might require termination of 
their service or public disclosure of the interest without prior consultation with 
the Agency. 

8. Employment. — Restrictions on SGE participation are appropriate in certain 
employment situations. When a prospective SGE is employed by a firm or serves 
as a consultant to a firm involved with products regulated by the particular 
FDA bureau/office with which he will serve, varying degrees of restrictions apply. 

(a) Certain employment situations do not warrant any restrictions on SGE 
participation as advisory committee members. Generally, there will be no restric- 
tion if an SGE's total remuneration from a single firm in the past 12 months was 
less than $1,000 and if his employment was not related to a specific matter before 
FDA. There are some exceptions to this rule noted in paragraph (6) below. 
Remuneration of less than $1,000 is considered "too inconsequential to affect 
the integrity of Government officers' or employees' service" as defined in 18 U.S.C. 
208(b)(2). Reimbursement for expenses and/or standard honoraria for presenting 
a scientific paper to, or participation in a scientific seminar with, the staff of a 
firm shall not preclude an SGE's participation or be included in the $1,000 limit 
described above. 

(b) Certain employment situations will require the individual to be disqualified 
from matters involving the firm in which he is/ was employed. Generally, any 
remuneration from a firm to a consultant or expert reviewer, and total remunera- 
tion from a firm to an advisory committee member that exceeds $1,000 in the 
past 12 months v/ill require the individual to be disqualified from matters involv- 
ing that firm. The same restriction shall apply if the SGE receives a retainer from 
a firm, or serves as a member of its board of directors, regardless of the amount 
■of remuneration received during the past 12 months. Additionally, if an individual 
has advised a firm at any time in the past on a matter that is now the subject 
of a proceeding before the Agency, the SGE is disqualified from participation 
in any decision related to that matter. 

(c) Certain levels of remuneration will require the individual not only to be 
disqualified from matters involving the firm with which he has been connected, 
but also to make public disclosure of such remuneration when the remuneration 
is of substantial amount or unusual nature. Remuneration from a single firm that 
exceeds $5,000 in the past 12 months is considered to be an amount that requires 
public disclosure. In addition to the dollar threshold, other circumstances may 
also warrant public disclosure, e.g., a substantial royalty from a firm defined in 
Section 5c. All public disclosure situations will require the approval of the Com- 
missioner or his designee. 

(d) In some instances, individuals may receive remuneration for publication 
or editing activities that may be sponsored or supported by firms defined in Section 
5c. Since the circumstances surrounding such activities can vary widely in terms 
of their potential for conflict of interest, such situations will be examined on a 
case-by-case basis. 

(e) The Agency would prefer that SGE's not enter into new employment 
situations with firms defined in Section 5c during their period of service. However, 



80 

in the event that an SGE makes a new emplo>Tnent commitment with such firms^ 
or negotiates with respect to one, he should notify the Agency immediately, so 
that any restrictions on his participation can be modified or extended accordingly 

9. Grants and contracts. — Restrictions on SGE paiticipation are appropriate 
when the SGE is involved in, or the recipient of, certain grants and contracts. 
Most of the restrictions apply when the grant or contract involves a firm defined 
in Section 5c. Paragraph (d) of this Section also outlines precautions that must be 
taken with respect to grants or contracts with the Federal Government. 

(a) Certain grant or contract situations will require the individual to be dis- 
qualified from matters invoKing the funding firm. Generally, an SGE will be 
excluded from matters involving a firm providing any grant or contract support 
in the past 12 months if the SGE is the principal investigator or is othermse 
directly involved, or if he receives financial support for his laboratory, or salary 
support for himself or member of his research group. Otherwise, the contract or 
grant is hkely to be "too remote" as discussed in Section 7a. 

(6) An SGE who has received more than $5,000 in grant or contract support 
from a single firm in the past 12 months will not only be disqualified from matters 
involving the firm but shall also be required to make public disclosure of such 
interests. In addition to the dollar threshold, other circumstances may also 
warrant pubUc disclosure, e.g., a long history or contracts with a single firm even 
if none has existed in the past 12 months. All public disclosure situations will 
require the approval of the Commissioner or his designee. 

(c) If, during his service with FDA, an SGE receives new or increased grant or 
contract support from a firm or begins negotiations with a firm in expectation of 
such support, he should inform the Agency immediately so that restrictions on 
his participation can be modified or extended accordingly. 

(d) FDA recognizes that SGE's may participate in grant or contract related 
activities that are not funded by firms defined in Section 5c. An SGE must exercise 
caution that any Federal grant and contract activities do not violate the provisions 
of 18 U.S.C. 203 and 205. These statutes prohibit a special Government employee 
from acting as an agent for anyone in relation to a particular matter (any pro- 
ceeding, application, contract or other matter) which is pending in the department 
or agency of the Government in which he is serving as an SGE. Thus representa- 
tion to the same Government department on behalf of an institution with respect 
to a grant or contract could inadvertently produce a violation. However, the 
statutes provide an exception to these restrictions when the department concerned 
utihzes the SGE's services for no more than 60 days during the immediately 
preceding 365 consecutive days. Individuals involved in such situations should 
be aware of the 60 day limitation, and carefullj- review any personal involvement 
in negotiation of a new Federal grant or contract for themselves or their employer 
or an institution with which they are affiliated. Time applied to work on a con- 
tract or grant does not count toward the 60 day limit; only time as an SGE 
applies. 

10. Investigators of products subject to premarket clearance. — Restrictions on 
participation are appropriate in certain situations where an SGE serves as an 
investigator of products subject to FDA premarket clearance. 

(a) Normally, there wiU be no restriction on an SGE who has been involved 
as an investigator with applications that are no longer pending before the Agency, 
even if he may be involved with related apphcations in his SGE duties. 

(6) An SGE ordinarily will be disquahfied from participation in matters for 
which he has been a past or current investigator on a premarket clearance appli- 
cation pending before FDA, unless the Agency requires advice that cannot be 
obtained elsewhere. In such case the situation will be publicly disclosed. Dis- 
closure may also be requii-ed if an SGE's past investigations or other activities 
have prominently identified him with a particular point of view in regard to a 
product or issue. 

(c) Investigators shall be subject to the restrictions in Section 8 if they receive 
any remuneration for their services, or the restrictions in Section 9 if they are 
funded by a grant or contract mechanism. In instances where the firm simply 
supphes the product under test without charge to an SGE investigator and reim- 
burses no other costs, such restrictions shall not apply. 

(d) If, during his service with FDA, an SGE initiates new investigator activ- 
ities, he should inform the Agency immediately so that any restrictions on his 
participation can be modified or extended accordingly. 

11. Restriction on post-employment activities. — 18 U.S.C. 207 prevents individuals 
who have left Government service, including former SGE's, from representing 



81 

another person in connection with certain matters in which they participated 
personally and substantially on behalf of the Government. The matters are 
those involving a specific party or parties in which the United States is also a 
party or has a direct and substantial interest. 

The questions created by the application of this statutory provision to specific 
situations are difficult. For example, FDA may appoint advisory committee 
members to review an entire class of products used by a particulai- ^roup of 
scientific or medical specialists. In such situations, the prospective SGE cannot 
always foresee the particular matters with which he may become involved to a 
personal and substantial degree. 

Because the Conflict of Interest Statutes were not intended to deny the Federal 
Government access to the highest quality scientific and medical advice, the 
Agency will utilize the exemption provided in the statutes when necessary. 
Section 207(b) of 18 U.S.C. permits the Government to grant an exemption from 
post-employment restrictions when it is in the national interest. FDA anticipates 
that there will be circumstances where it will be in the national interest to consider 
granting such an exemption to advisory committee members and other consultants 
and experts. 

In addition to the previous restriction, 18 U.S.C. 207 also prevents a former 
employee for a period of one year after his employment has ceased, from appearing 
personally for another person before a court, department or agency in any matter 
that was within the area of his official responsibility at any time during the last 
year of his Government service. FDA believes that this one year limitation on 
all particular matters would not ordinarily apply to advisory committee members 
because they do not have ''official responsibility" in the sense intended by the 
statute. SGE's employed by FDA are usually involved in either broad policy 
and procedures covering a number of products (which are not considered a par- 
ticular matter), or particular matters that are not likely to recur. 

Whenever an SGE believes his service may result in a post-employment 
restriction, he should seek advice from FDA by contacting the particular FDA 
employee who has the administrative responsibility for his employment. This 
same official should also be contacted whenever a situation arises that pertains 
to an SGE's involvement with another agency or court on behalf of a party 
other than the Government over a matter regulated by FDA. 

12. Summary of restrictions. — Sections 7 through 10 discuss situations involving 
various categories of financial interests which could limit an SGE's participation. 
As an aid to prospective SGE's, the following table summarizes the general 
restrictions. For specific details and special circumstances, readers should refer 
to the sections of the guide noted in parentheses in the right-hand column of the 
table. 



82 

Summary of Rettrictiont 



Type of interest > and size or nature oj inter ett 



Restriction* 



Investments (sec. 7) : 

Less than $1,000 in single firm 

More than $1,000 in single firm 

More than $5,000 in single firm 



Employment (sec. 8) : 

Less than $1,000 from single firm in 
past 12 mo. 

More than $1,000 from single firm 
in past 12 mo.; any retainers or 
membership on board of di- 
rectors. 

More than $5,000 from single firm 
in past 12 mo. 

Grant or contract (sec. 9) : 

Anv support from single firm in past 

12 mo. 
More than $5,000 from single firm 
in past 12 mo. 

Any Federal grant or contract 

Investigators of products subject to pre- 
market clearance (sec. 10):' 

Past involvement with application 
no longer pending before agency. 

Past or current involvement with 
application pending before 
agency. 

Involvement with pending applica- 
tion and individual's advice es- 
sential ; individual prominently 
identified with particular point 
of view. 



No restriction in participation involv- 
ing the firm.2 (7a.) 

Disqualified from participation involv- 
ing the firm. (7b). 

Disqualified from participation involv- 
ing the firm and required to make 
public disclosure. (7c) . 

No restriction in participation involv- 
ing the firm.2 (8a). 

Disqualified from participation involv- 
ing the firm. (8b). 



Disqualified from participation involv- 
ing the firm and required to make 
public disclosure. (8c). 

Disqualified from participation involv- 
ing the firm. (9a). 

Disqualified from participation involv- 
ing the firm and required to make 
public disclosure. (9b). 

Possible postemplovment restriction. 
(9dandll). 



No restriction in participation involv- 
ing the firm. (10a). 

Disqualified from participation involv- 
ing the firm. (10b). 

Public disclosure. (10b). 



'Applies to interests in firms involved with products regulated by the particular FDA bureau/office 
employing the special Government employee. 

- Applies to advisory committee members only. Consultants and expert reviewers will be excluded from 
participation in matters involving firms in which they have any interest. 

3 If remunerated for services, criteria set forth in sec. 8 will apply. 



APPENDIX VII 

Federal Communications Commission Conflict of Interest Program 
Document "10/25 Formula" Memorandum of April 11, 1977 

factors that will be applied in the review of waiver applications under 

18 U.S.C. 208 

On Wednesday, March 9, 1977, the Commission approved the use of a formula, 
plus additional factors, to be applied when the financial interests involved exceed 
the 10/25% formula applied to permissible holdings by members of the immediate 
family of the FCC employee. 

Under this procedure, waivers will be generally granted to an employee whose 
spouse, or other relative in the immediate household, has financial interests in 
enterprises the employee is prohibited from holding by Section 4(b), provided 

1. the financial interest is in a given enterprise where the monetary amount of 
the interest does not exceed one-tenth (1/10) of the employee's annual salary, 
or 

2. the diversified financial interests are in a portfolio where the monetary amount 
of the combined interests does not exceed one-fourth (1/4) of the employee's 
annual salary, as long as no one stock exceeds 10%. 

When these interests exceed the 10/25% formula, individual review of the 
waiver request will be made against the following factors : 

1. Means by which interests were acquired — whether by inheritance, gift, or 
any means distinct from those involving the transfer of such interests by the em- 
ployee since joining the FCC. 

2. Length of time the interests have been held by a member of the employee's 
immediate family. 

3. Relationship, if any, of the financial interests to the position occupied by 
the employee in his duties. 

4. Regulatory relationship between the FCC and the enterprise in which the 
financial interests are held. 

5. Approximate percentage of the corporation's income derived from products 
or services falling within the regulatory responsibility of the FCC. 

6. Position of employee requesting the waiver. 

7. Evaluation of Bureau Chief's determination regarding waiver request. 
Determination 1 through 7 must be made for each stock or equity interest in 

the portfolio. An analysis of the factors listed above reveals that they relate to 
Section 208 and, therefore, should be considered in making decisions whether to 
grant waiver requests. 

Factor one which concerns how property was acquired directly relates to whether 
the property is in fact the separate property of the spouse and not subject to the 
inter vivos property rights of the marriage partner. 

Factor two is relevant because there should be some consideration given to 
possible hardship where we have in the past granted an individual a waiver, and 
the integrity of his service has not been questioned during the time his spouse 
has held the stock in question. 

Factors three, four and six are relevant because they directly relate to whether 
the individual "participates personally and substantially" in decisions affecting 
an enterprise in which his spouse holds a financial interest. 

Factors five and seven directly relate to the integrity of the employee's service 
to the agency. The amount of communications business a company is involved 
in has a bearing as to whether an employee would be suspected of taking some 
action to affect the value of the company's stock. The Bureau Chief's determina- 
tion, regarding whether the interest will affect the employee's integrity, is another 
element in determining whether financial interests of the employee's spouse may 
be said to be "likely to affect the integrity of the services which the Government 
may expect from such oflBcer or employee," Title 18 U.S.C. § 208(b). 

The factors listed above are intended as guides to administer the waiver pro- 
vision in 208(b). Our experience may find that some or all of these factors are 
pertinent in our deliberations on waiver requests. 

Werner K. Hartenberger, 

General Counsel. 
(83) 



APPENDIX VIII 
Section 308; Clean Air Act Amendments of 1977 

FlNANGIAIi disclosure; CONFLICTS OF INTEREST 

Sec. 308. Title III of the Clean Air Act is amended by adding the following 
new section at the end thereof: 

"Financial disclosure; conflicts of interest 

"Sec. 318. (a) Each person who — 

"(1) has any known financial interest in (A) any person subject to this 
Act, or (B) any person who applies for or receives any grant, contract, or 
other form of financial assistance pursuant to this Act, and 

"(2) is (A) an officer or employee of the Environmental Protection Agency 

who performs any function of duty under this Act, (B) a member of the 

National Commission on Air Quality appointed as a member of the public, 

or (C) a member of the Scientific Review Committee under section 109(d) 

shall, beginning six months after the date of enactment of this section, annually 

file with the Administrator a written statement concerning all such interests 

held by such officer, employee, or member during the preceding calendar year. 

^uch statement shall be available to the public. 

"(b) The Administrator shall — 

"(1) act -within ninety days after the date of enactment of the Clean Air 
Act Amendments of 1977 — 

"(A) to define the term 'known financial interest' for purposes of 
subsection (a) of this section; 

"(B) to establish the methods by which the requirement to file 
written statements specified in subsection (a) of this section will be 
monitoi^d and enforced, including appropriate provisions for the filing 
by such officers, employees and members of such statements and the 
review b}^ the Administrator (or the Commission in the case of members 
of the Commission) of such statements; and 
"(2) report to the Congress on June 1 of each calendar year with respect 
to such statements to the Administrator and the actions taken in regard 
thereto -during the prceding calendar year. 
"(c) After the date one year after the date of the enactment of this section, 
no person who — 

"(1) is employed by, serves as attorney for, acts as a consultant for, or 
holds any other official or contractural relationship to — 

"(A) the owner or operator of any major stationary source or any sta- 
tionary source which is subject to a standard of performance or emission 
standard under section 111 or 112, 

"(B) any manufacturer of any class or category of mobile sources if 
such mobile sources are subject to regulation under this Act, 

"(C) any trade or business association of which such owner or operator 
refeiTed to in subparagraph (A) or such manufacturer referred to in sub- 
paragraph (B) is a member, or 

"(D) any organization (whether or not non-profit) T\iiich is a party to 
litigation, or engaged in political, educational, or informational activities, 
relating to air quality, or 
"(2) owns, or has any financial interest in, any stock, bonds, or other 
financial interest which ownership or interest may be inconsistent with a 
position as an officer or emploj^ce of the Environmental Protection Agency, 
as determined under regulations of the Administrator, 
may concurrently serve as such an officer or employee of the Environmental 
Protection Agency. 

"(d) Th^ Administrator shall promulgate rules for purposes of subsections (b) 
and (c) -wiiich — 

(84) 



85 

"(1) identify specific offices or positions within such agency which are of a 
nonregulatory or nonpolicy-making nature and provide that officers or em- 
ployees occupying such positions shall be exempt from the requirements of 
this section, and 

"(2) identify the ownership or financial interests which may be inconsistent 

with particular regulatory or policy making offices or positions within the 

Environmental Protection Agency. 

"(e) Any oflScer or employee of the Environmental Protection Agency or member 

of the National Commission on Air Quality or of the Scientific Review Committee 

under section 109(d) who is subject to, and knowingly violates, this section or any 

regulation issued thereunder, shall be fined not more than $2,500 or imprisoned not 

more than one year, or both. 

"(f) Nothing in this section shall be construed to affect or impair any other 
federal statutory requirements respecting disclosure or conflict of interest appli- 
cable to the Environmental Protection Agency. Subsections (c) and (d) of this 
section shall not apply after the effective date of any such requirements respecting 
conflicts of interest which are generally applicable to departments, agencies, and 
instrumentalities of the United States.". 

(Note: These statutory provisions reflect several of the recommendations 
offered in this Report. See especially Sections (c) and (d).) 



MINORITY VIEWS 

Although there is much in this subcommittee report T\'ith which 
we can agree, we offer these views to specify our alternative approach 
to the question of fmancial conflicts of interest. We agi'ee, for instance, 
on the following points made in the report : 

1. That the line agencies and the Civil Service Commission (CSC) 
have been lax in their administration of their financial conflicts of 
interest programs; 

2. That substantial improvements are urgently needed both in the 
existing conflict of interest laws as well as their implementation and 
enforcement ; 

3. That the Civil Service Commission has failed to provide the 
leadership and guidance to agencies that could hlep make conflicts 
regulations more equitable and effective ; 

4. That a clear need exists for agencies to inform their employees 
specifically as to what stocks should be avoided; 

5. That the agencies should circulate to their employeee a guide 
on conflicts matters, written in clear English, explaining employee 
responsibilities under the statutory law and regulations issued pur- 
suant to the appropriate laws; 

6. That an independent Ofl&ce of Government Ethics should be 
established within the CSC, but we feel the establishment of a separate 
agency for this purpose is unwarranted. 

We believe that these six points just referred to would in and of 
themselves greatly eliminate many of the types of problems that 
the subcommittee staff found in their review of the files at the three 
agencies which WTre investigated. In the main, the problem areas 
cited by the report appeared to us as stemming from basically three 
sources: First, administrative laxity on the part of the line agencies 
and the CSC; second, lack of employee information on the nature and 
extent of conflict matters; and third, poorly constructed and multiple 
standards governing conflicts of interest. 

Our principal point of disagreement with the subcommittee report 
is in the area of the standards for determining what should constitute 
a conflict of interest. The subcommittee majority ap})arently favors 
the retention of the various standards, albeit with modifications, 
already contained in the law which would be 18 U.S.C. 208, Executive 
Order 11222, and various statutory requirements governing individual 
agencies such as section 4(b) of the Communications Act. As we have 
already stated, we believe that the existence of these various re- 
quirements is one of the causes of the problems found by the sub- 
committee and as such, we would recommend the adoption of a single 
uniform standard. Specifically, we would recommend the repeal of 
statutory provisions dealing with single agencies such as section 4(b) 
of the Communications Act, also the rei)eal of 18 U.S.C. 208, and the 
recission of Executive Order 11222 to be replaced by a single uniform 
conflicts of interest standard apj)licable to all Government agencies 

(86) 



87 

both executive branch and independent regulatory. Only in this way 
are ^\e going to achieve the uniformity and ease of administration 
necessary to properly and efficiently administer this program. 

The next question to be adch'essed is what would our standard be? 
Before stating our proposal, we believe it is important for us to 
discuss at the outset some of the factors which influenced our formu- 
lation. First, we believe that an employee should not be ])rohibited 
from owning stock in a company that is not significantly regulated 
by his or her agencA'. An exam])le of this would be an FCC employee 
who owned stock in Pennzoil Corj)., which is not significantly regu- 
lated by the FCC although the}' do own a miniscule number of 
shares in Aeronautical Radio, Inc., a company which provides 
communications services to airlines. Second, we believe the standard 
should be applicable only to the individual agency employee. 

Our standard, which would be ai)i)licable to emploAees at the GS-16 
level and above, thus, would be that an agency emj)loyee would 
not be proscribed from owning stock in a company that was not 
significantly regulated by the agenc}'. The term ''significantly regu- 
lated" would be defined by the respective agencies by rule, and they 
would be required to periodically publish a list of firms that fell 
within the purview of that definition. We would require that this 
list be made available to all affected employees in the agency. The 
agencies are obvioush' in the best position to make this determination 
concerning which companies are significantly regulated. 

To implement this plan, of course, those persons at the GS-16 
level and above would be required to file with the head of their 
respective agency a AATitten financial disclosure statement. The 
method b}' which this requirement would be fulfilled can be established 
by agency rule. 

Another important aspect of our plan that we should point out is 
that it relates to employees, and does not cover spouses and minor 
children. The subcommittee report would apply its proposed conflict 
of interest restrictions to these so-called constructive interests as 
well. On this point, we obviously disagree. 

Men at common law, since its earliest beginnings, have been 
permitted to own property independent of their wives. Married women, 
on the other hand, were not allowed to do so. This inequity was 
remedied by the adoption by the various States of the Married 
Woman's Property- Acts beginning in the 1800's, which acts provide 
ordinarily that the married woman's property remains her own 
notwithstanding the marriage, that it may be conveyed by her and 
that it is not subject to claims against her husband. Additionally, 
under these acts a married woman's ])roperty is defined as that 
which she owned before marriage as well as that which she acquires 
during marriage. The Alarried Womxan's Property Acts were adopted 
to overcome the ancient common law rule which provided that upon 
her marriage the Vv'ife's personal property and possessions became the 
property of her husband. Blackstone said that these legal disabilities 
of married women were deri^^ed from the principle that upon marriage 
husband and wife acquired a "unity of person". 

Bi- adopting the constructive-ownership concept, the subcommittee 
report appears to be turning back the clock to the pre-1800 poiiod, 
and reinstating the legal fiction of unity of person which has been 



88 

repudiated by modern statutes. State le^slatures and the Congress^ 
have been and are continuing to adopt measures that insure that 
women who are married can have financial status independent of their 
spouse. This construstive-o^^^lership rule litemlly flies in the face of 
these efforts to insure that financial independence is legalh^ protected. 

TVe believe that both men and women who are married should have 
the unfettered right to own and possess property independent of their 
spouse. If the constructive-o^^^lership rule were adopted, what a 
husband or wife could own would be determined by the place of their 
spouse's employment. If one of them occupied a senior position in 
the executive branch or the independent agencies, the other's ability 
to possess certain personal property would obviously be impaired. 

We do not believe that Government should trample upon or 
restrict a spouse's ability to retain property just because their husband 
or wife happens to be employed by the Federal Government. What if 
such a constructive-ownership rule were adopted and a spouse refused 
to sell stock that he or she owned, should the husband or wife be 
required to abandon their employment with the Federal Government 
because of the actions of the other? We think not. 

A further point needs to be made on this subject of spousal owner- 
ship. We are increasingly finding a trend in American life where two 
professionals with independent careers and financial status are 
marrying. Additionally, we believe that this trend will continue at 
an even greater pace in the future as a direct result of the fact that 
increasingly more women are attending and graduating irom our 
colleges and professional schools. This is a group of persons that is 
very likely to acquire independent ownership in securities both prior 
to and during marriage from independent sources of income. To 
suggest at this point in time that this ability to acquire stock owner- 
ship should be limited simpl}^ because their spouse is employed by the 
Federal Government strikes us as a truty outmoded approach which 
will not be accepted by an ever-increasing segment of our population. 

With respect to minor children, should a child whose grandparents 
established a trust for his or her benefit which contains stock holdings 
in a company regulated by the agency that employs their father or 
mother be required to be divested. In such a case, the child has 
equitable title and the trustee has legal title to the corpus of the trust. 
Alternatively, what if the child inherits stock directl}' from a grand- 
parent, should that stock be divested? We think not. Children have 
legal rights also and the courts are increasingly taking cognizance of 
these rights. 

We realize that the subcommittee majority perceives that stock, 
ownership in a regulated company by the spouse or minor child of a 
Federal employee presents an apparent conflict. We do not agree that 
apparent conflicts should be conclusively deemed as actual conflicts 
as the majority would. Is not, however, the harm to be done by forcing 
this constructive-ownership approach upon persons other than the 
actual employee something that we should seek to avoid when the 
benefits to be derived are at best theoretical. We are aware of no case 
where it can be successfufly shown that a regulatory decision was 
biased in favor of a comi)am', because the regulator's spouse or minor 
children owned stock in that company. 



89 

Although we would permit spousal ownersliip of stock, there is one- 
situation which does give us some concern. The situation in question 
is where a husband or wife is an employee of the Federal Government 
and that employee transfers his or her financial interest to their spouse 
for the sole purpose of avoiding the rules governing conflicts of inter- 
est. We do not look with approval upon such a transfer unless the 
spouse receiving the interest pays full value for it rather than simply 
no or nominal consideration. Such transfers to circumvent the conflicts 
rules of this type should not be sanctioned, but an arms length type 
transaction should be permissible. The Office of Government Ethics 
at the CSC should pay particular attention to conveyances of this 
type and should issue regulations governing transfers between sj^ouses 
both during the period of Government service as well as transfers in 
contemplation of government service. 

One final comment should be directed toward mutual funds which 
constitute indirect ownership of securities through ownership in mu- 
tual fund shares. We believe that such ownership should be fully 
permitted. In these cases the fund's manager has the responsibility 
for the buying and selling of the fund's securities, and the shareholder 
has no influence of these decisions. Although not stated explicitly so 
by the majority in their report, we believe that we are in accord on 
this point. The subcommittee's staff report also endorses this type of 
indirect stock ownership and, as such, w^e find no disagreement on 
this point. 

The major thrust of the existing rules on Financial Conflict of Inter- 
est seems to qualify only persons for employment with the Federal 
Government who own no stock. The encouragement is not to save 
money from earnings because the prudent investor is potentially sub- 
ject to conflict. The indirect business relationship makes all stocks- 
subject to potential objection in some form. Let's list specific conflict 
stocks in each department which will then give discretion for invest- 
ment beyond this list. 

If the present rules are not modified, the U.S. Government will have 
limited selection choice for key appointments to top executive posi- 
tions. We will see a selection list of people with little or no experience.. 

Hon. James M. Collins. 
Hon. Matthew J. Rinaldo. 
Hon. Marc L. Marks. 
Hon. Norman F. Lent.. 

o 



UNIVERSITY OF FLORIDA 



3 1262 09119 2442